APMacro: Multiple Expansion, Reserves and Mulltiplier

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Students, you will learn how banks expand the money supply by lending out excess reserves. Because this process is so important when analyzing monetary policy, we have lots of practice in calculating reserve requirements, required reserves, excess reserves, demand deposits, and money multipliers. It is dog work, but practice should help you see the multiple expansion of reserve requirements at work.

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Homework:
1) Multiple Expansion of Demand Deposits worksheet
2) Reserve Requirements and the Multiplier worksheet

Gov: Current Events

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Death of Antonin Scalia: Confirmation of a Justice of the Supreme Court

Moments after the news broke of the death of Supreme Court Justice Antonin Scalia, Senate GOP leaders immediately made it clear they will not confirm a nominee from President Barack Obama to replace him and are prepared to wait until a new president is in office, keeping in line with tradition that dates back decades. At issue is the so called Thurmond Rule, an informal Senate tradition named for the long serving former South Carolina Republican Sen. Strom Thurmond, that says judicial nominations should not be considered in the period leading up to a presidential campaign. The Thurmond Rule has been cited or conveniently used by members of both parties over the years to curb the flow of judicial nominations in an election year, as the party in charge of the Senate works to keep as many lifetime judicial appointments as possible out of the hands of the sitting president from the opposite party.

Democratic leaders argued it would be irresponsible for the GOP controlled chamber to wait that long to confirm a new justice. Unfortunately for Democrats, there is little they can do to force Republicans to act outside of making their case to the public and hoping Republicans buckle to political pressure. But Republicans, who are already furious with Obama’s many executive actions on climate change, immigration and other issues that go around the will of Republican Congress, are unlikely to cave.

Questions to Consider

• Why is the Supreme Court the court of last resort?
• What are the qualifications for a Justice of the Supreme Court?
• How does the judicial branch of the American government balance the legislative and executive branches?
• How does the nomination and confirmation process connect all three branches of the government? How is popular sovereignty demonstrated in this process? How is limited government demonstrated in this process?
• Is the judiciary the “least dangerous” branch?
• What is the process for nominating and confirming a justice of the Supreme Court?
• What is the role of the Senate? Can the Senate delay the confirmation process? Should the Senate delay the confirmation process? Why or why not?
• What options does President Obama have in selecting a Supreme Court Justice?
• Why are there nine Justices on the Supreme Court? How are decisions made when there are only eight sitting Justices?
• Which important cases are on the docket of the Supreme Court in 2016?
• How might political polarization affect the nomination and confirmation of a Supreme Court Justice? How might the selection of a Supreme Court Justice impact the 2016 presidential election?
• What powers are given to the judiciary in the Constitution?
• Why is judicial independence necessary? What constitutional provisions assure this independence?

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Homework:
1) Judicial System Quiz: Chapter 15 pp.281-295 and Chapter 5 pp.83-97

APMacro: Chapter Questions

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Chapter questions: #1, 2, 4, 5, 6, 7, 8, 9, 10, 12, & 13 corrections.

Review

• A bank’s balance sheet must balance. The bank’s assets are claimed by owners (net worth) or by nonowners (liabilities). Assets = liabilities + net worth.
• The maximum amount of checkable deposit expansion is determined by multiplying two factors: the excess reserves by the money multiplier. However, each factor is affected by the required reserve ratio. The money multiplier is calculated by dividing 1 by the required reserve ratio. Excess reserves are determined by multiplying the required reserve ratio by the amount of new deposits. Therefore, a change in the required reserve ratio will change the money multiplier and the amount of excess reserves. 
• For example, a required reserve ratio of 25% gives a money multiplier of 4. For $100 in new money deposited, required reserves are $25 and excess reserves are $75. The maximum checkable deposit expansion is $75 x 4 = $300. If the reserve ratio drops to 20%, the money multiplier is 5 and excess reserves are $80, and the maximum checkable deposit expansion is 5 x $80 = $400. Both factors have changed.
• Be aware that the money multiplier can result in money destruction as well as money creation in the banking system. You should know how the money multiplier reinforces effects in one direction or the other.

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Homework:
1) Learnerator: Demand & Supply Equilibrium #1-24, Macroeconomic issues #1-15

Gov: Bill of Rights Court Cases Review

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The first ten amendments were added to the Constitution to safeguard civil liberties and civil rights. However, it took many years for the Supreme Court to apply the Bill of Rights to the actions of state and local governments.

The Bill of Rights defines rights and liberties in broad, abstract terms. The judicial branch interprets the first ten amendments and applies them to actual circumstances.

the First Amendment protects the freedoms of religion, speech, the press, and assembly. It also guarantees the right to petition the government.

the Second, Third, and Fourth amendments are designed to protect the rights of citizens from government abuses of power.

The Fifth, Sixth, Seventh, and Eighth amendments define and protect rights under the judicial system.

The Ninth Amendment protects other, unnamed rights not specified in the Bill of Rights. The  Tenth Amendment reserves powers not granted to the federal government to the states or the people.

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Homework:
1) Judicial System Quiz: Chapter 15 pp.281-295 and Chapter 5 pp.83-97

 

APMacro: Multiple Expansion Checkable Deposits

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A single bank in a banking system can lend one dollar for each dollar of its excess reserves. The commercial banking system can lend, that is, can create money, by a multiple of its excess reserves.

Suppose a person finds a $100 and deposits the $100 in bank A, which adds the $100 to its reserves. Of the newly acquired $100 in currency, 20 percent, or $20 must be earmarked for required reserves on the new $100 checkable deposit, and the remaining $80 goes to excess reserves. A single bank can lend only an amount equal to its excess reserves, therefore bank A can lend a maximum of $80.

When a loan for this amount is made, bank A’s loans increase by $80 and the borrower gets an $80 checkable deposit.

We add these figures to bank A’s balance sheet.

The borrower draws a check for the entire amount of the loan ($80) and gives it to someone who deposits it in bank B, a different bank. Bank A loses both reserves and deposits equal to the amount of the loan. The net results of these transactions is that bank A’s reserves now stand at ($100 – $80 = )$20, loans at $80, and checkable deposits at ($180 – $80 =) $100. Bank A is just meeting the 20 percent reserve ratio.

Bank B acquires the reserves and the deposits that bank A has lost. When the borrower’s check is drawn and cleared, bank A loses $80 in reserves and deposits and bank B gains $80 in reserves and deposits.

But 20 percent or $16 of bank B’s new reserves must be kept as required reserves against the new $80 in checkable deposits. This means that bank B has ($80 – $16 =)$64 in excess reserves. It can therefore lend $64 to a new borrower

We add these figures to bank B’s balance sheet.

The new borrower draws a check for the entire amount of the loan and deposits it in bank C. The reserves and deposits of bank B fall by $64. As a result of these transactions bank B’s reserves now stand at ($80 – $64 =)$16, loans at $64, and checkable deposits at ($144 – $64 =)$80. After all this, bank B is just meeting the 20 percent reserve requirement.

On the basis of only $80 in excess reserves, acquired by the banking system when someone deposited $100 of currency in bank A, the entire banking system is able to lend $400. The banking system can lend excess reserves by a multiple of 5 when the reserve ratio is 20 percent.

The banking system magnifies any original excess reserves into a larger amount of newly created checkable deposit money. The money multiplier is similar in concept to the spending multiplier. The money multiplier exists because the reserves and deposits lost by one bank becomes reserves of another bank. It magnifies excess reserves into a larger creation of checkable deposit money.

Money multiplier = 1 / required reserve ratio

By multiplying the excess reserves by the money multiplier, we can find the maximum amount of new checkable deposit money that can be created by the banking system.

Maximum checkable deposit creation = excess reserves X money multiplier

The process we have described is reversible. Just as checkable deposit money is created when banks make loans, checkable deposit money is destroyed when loans are paid off. Loan repayment sets off a process of multiple destruction of money the opposite of the multiple creation process. Because loans are both made and paid off in any period, the direction of the loans, checkable deposits, and money supply in a given period will depend on the net effect of the two processes. If the dollar amount of loans made in some period exceeds the dollar amount of loans paid off, checkable deposits will expand and the money supply will increase. But if the dollar amount of loans is less than the dollar amount of loans paid off, checkable deposits will contract and the money supply will decrease.

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Homework:
1) Read Chapter 13 pp.245-254.  Answer questions #1, 2, 4, 5, 6, 7, 8, 9, 10, 12, 13
2) Learnerator: Demand & Supply Equilibrium #1-24, Macroeconomic issues #1-15

Gov: Court System Review

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The U.S. judicial system has evolved over more than two centuries to meet the needs of a changing society. Today’s federal and state courts not only resolve conflicts, but also shape public policy through the judicial review process.

The U.S. has two separate but related court systems, one federal and one state. The two systems maintain exclusive jurisdiction in some areas but overlap when cases involve both state and federal laws.

Each state has its own hierarchy of courts. Trial courts of limited and general jurisdiction handle most cases. Intermediate appeals courts and state courts of last resort review cases appealed from the lower courts.

Most cases involving federal law and the Constitution are tried in U.S. district courts. Decisions made there can be appealed to higher courts, including the Supreme Court. The federal judicial system also includes special courts with very specific jurisdictions.

Many state judges are elected or appointed by the governor or legislature. In states using merit selection, judges are appointed and then confirmed by voters in a retention election. Federal judges are appointed by the president and confirmed by the Senate.

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Homework:
1) Judicial System Quiz: Chapter 15 pp.281-295 and Chapter 5 pp.83-97

APMacro: Money Creating Transactions

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In addition to accepting deposits, commercial banks can create money by making loans to borrowers and by purchasing government bonds from the public. When a bank makes loans, it creates money.

In transaction 6a, there was a change in the composition of the money supply, but no change in the supply of money. When banks lend, they create checkable deposits that are money. By extending credit, the bank has monetized an IOU. The claim created by a borrower and given to the bank is not money; an individual IOU is not acceptable as a medium of exchange. But the claim created by the bank and given to the borrower is money; checks drawn against a checkable deposit are acceptable as a medium of exchange.

Much of the money we use in our economy is created through the extension of credit by commercial banks. This checkable deposit money may be thought of as debts of commercial banks and thrift institutions. Checkable deposits are bank debts in the sense that they are claims that banks and thrifts promise to pay on demand.

The borrower writes a check for $50,000 drawn against the borrower’s bank and is deposited in another bank. The check is collected in the manner described in an earlier lesson (transaction 5). As a result the bank loses both reserves and deposits equal to the amount of the check. After the check has been collected, the bank just meets the required reserve ratio of 20 percent. The bank has no excess reserves.A single commercial bank in a multibanking system can lend only an amount equal to its initial preloan excess reserves.

When a bank buys government bonds from the public, the effect is substantially the same as lending. New money is created. Suppose that instead of making a $50,000 loan, the bank buys $50,000 of government securities from a securities dealer. The bank receives the interest bearing bonds which appear on its balance sheet as the asset “Securities” and gives the dealer an increase in its checkable deposit account. Checkable deposits, that is the supply of money, have been increased by $50,000. Bond purchases from the public by commercial banks increase the supply of money in the same way as lending to the public does. The bank accepts government bonds, which are not money, and gives the securities dealer an increase in its checkable deposits, which is money.

When the securities dealer draws and clears a check of $50,000 against the bank, the bank loses both reserves and deposits in that amount and the just meets the legal reserve requirement.

Finally, the selling of government bonds to the public by a commercial bank, like the repayment of a loan, reduces the supply of money. the securities buyer pays by check and both “Securities” and “Checkable deposits” decline by the amount of the sale.

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Homework:
1) Read Chapter 13 pp.245-254.  Answer questions #1, 2, 4, 5, 6, 7, 8, 9, 10, 12, 13
2) Learnerator: Demand & Supply Equilibrium #1-24, Macroeconomic issues #1-15

Gov: Judicial Views

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The most controversial cases decided by the Supreme Court are often those that involve judicial review. Nowhere does the Constitution mention the power of judicial review. In 1803, the Supreme Court took on that duty for the first time in Marbury v. Madison. In that case, the Court declared a portion of the Judiciary Act of 1789 to be unconstitutional. It thus established the power of the judiciary to review the constitutionality of legislative or executive actions. Over time, judicial review has become the judicial branch’s most important check on the other two branches. More than two centuries after the Court assumed this power, Americans are still divided about its proper use. On one side are supporters of judicial activism, and on the other are advocates of judicial restraint.

Judicial activism is based on the belief that the Court has both the right and the obligation to use its power of judicial review to overturn bad precedents and promote socially desirable goals. Liberals tend to be more supportive of judicial activism than are conservatives. They look to the Court to defend the rights of women and minorities, for example, when legislatures fail to act.

Advocates of judicial restraint hold that judicial review should be used sparingly, especially in dealing with controversial issues. Conservatives tend to be more supportive of judicial restraint than are liberals. In their view, elected representatives, not unelected judges, should make policy decisions.

Spring Break

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APMacro: Bank Balance Sheet

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All commercial banks and thrift institutions that provide checkable deposits must by law keep required reserves. Required reserves are an amount of funds equal to a specified percentage of the bank’s own deposit liabilities. A bank must keep these reserves on deposit with the Federal Reserve Bank in its district or as cash in the bank’s vault. This specified percentage of checkable deposit liabilities that a commercial bank must keep as reserves is known as the reserve ratio. 

Reserve ratio = bank reserves / total checkable deposit liabilities.

The Federal Reserve has the authority to establish and vary the reserve ratio within limits legislated by Congress.

The bank receives $100,000 cash deposit from customers and businesses, which is an asset to the bank. This money is deposited in the bank as checkable deposits or checking account entries, rather than as savings accounts or time deposits. these newly created checkable deposits constitute claims that the depositors have against the assets of the bank and therefore are a new liability account. 

The reserve ratio for checkable deposits is 20 percent. By depositing $20,000 in the Federal Reserve, the bank will be meeting the required 20 percent ratio between its reserves and its own deposit liabilities. We use “reserves” to mean the funds commercial banks deposit in the Federal Reserve Banks, to distinguish those funds from the public’s deposits in commercial banks.

Suppose, instead of sending the minimum amount of  $20,000, the bank sends an extra $90,000 for a total of $110,000. A bank would not deposit all its cash in the Federal Reserve Bank. We’re doing it to simplify the problem, so we don’t need to bother adding two assets, “cash” and “deposits in the Federal Reserve Bank” to determine “reserves.”

A bank’s excess reserves are found by subtracting its required reserves from its actual reserves.

Excessive reserves = actual reserves – required reserves

 To compute the excess reserves, multiply the bank’s checkable deposit liabilities by the reserve ratio to obtain the required reserves ($100,000 x 20 % = 20,000). Subtract the required reserves from the actual reserves listed on the asset side of the bank balance sheet. In this case excess reserves = $110,000 – $20,000 = $90,000.

Assume that farmer Harvey deposited a substantial portion of the $100,000 the bank received in transaction 3. Suppose farmer Harvey buys $50,000 of farm machinery from Snarf Farming Equipment. Farmer Harvey pays for this machinery by writing a $50,000 check against his deposit in the bank. Harvey gives the check to Snarf. Snarf deposits the check into their bank. Whenever a check is drawn against one bank and deposited in another bank, collection of that check will reduce both the reserves and the checkable deposits of the bank on which the check is drawn. Conversely, if a bank receives a check drawn on another bank, the bank receiving the check will in the process of collecting it, have its reserves and checkable deposits increased by the amount of the check.

Harvey’s bank discovers that one of its depositors has drawn a check for $50,000 against his checkable deposit. The bank reduces checkable deposits by $50,000 and notes that the collection of this check caused a $50,000 decline in its reserves at the Federal Reserve Bank.

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Homework:
1) Read Chapter 13 pp.245-254.  Answer questions #1, 2, 4, 5, 6, 7, 8, 9, 10, 12, 13
2) Learnerator: Production Possibilities Curve #1-20, Inflation #1-30, Unemployment #1-30