By Brian P. Simpson
Read or Download Money, Banking, and the Business Cycle: Volume I: Integrating Theory and Practice PDF
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Extra resources for Money, Banking, and the Business Cycle: Volume I: Integrating Theory and Practice
One gets an idea here of how volatile the money supply can be under a fractional-reserve banking system. The money supply can expand dramatically and has the potential to contract drastically. The fractional-reserve banking system plays a major role in creating the business cycle. Just what that role is will be discussed extensively in subsequent chapters. Inflation To understand the business cycle, it is important to have a good understanding of inflation. To this end, I discuss a number of definitions of inflation in this section.
Reserves can be held in the form of vault cash or as deposits at the Federal Reserve. Of course, banks will want to loan out some of the funds they receive to earn interest on them. Today, banks are legally required to keep some funds on hand as reserves to back deposits in checking accounts. When banks have less than 100Â€percent of their checking deposits on hand as reserves, this is known as fractional-reserve banking. 1â•… Example of a blank balance sheet. 2â•… Bank balance sheet. backed by standard money.
The loans made at the DR are short-term loans. During the 2008 financial crisis, the Fed began making longer-term loans not only to banks but to nonbank financial institutions, such as insurance companies and brokerage firms. These loans might range from a few months to several years and change the money supply in the same manner as loans at the DR (when lending directly to banks) or buying government bonds (when lending to non-bank financial institutions). Another method the Fed started using to manipulate the money supply during the 2008 financial crisis is buying and selling assets other than government debt that are held by banks and financial institutions.