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RESERVE RATIO: The amount of reserves required by the Federal Reserve System as a ratio of the amount deposits backed by the reserves. Modern reserve ratios are in the range of 1-3% for checkable deposits. The reserve ratio plays a key role in the deposit multiplier. The simple deposit multiplier is simply the inverse of the reserve ratio. If the reserve ratio is 5%, then the deposit multiplier is 20. It's just that simple.
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Lesson 19: Money Creation | Unit 3: Modern Banking
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Page: 13 of 23
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Topic:
Yet Another Bank
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- A purchase is made with a check written on Bob's State Bank, which is deposited in Charley's Credit Union.
- Charley's Credit Union adds $81 worth of liabilities to the store's account.
- This liability is balanced with reserves transferred from Bob's Bank.
- Bob's Bank losses $81 and Charley's Credit Union gains $81 of reserves.
- Bob's Bank ends up with $9 of reserves and an $81 loan.
- Charley's Credit Union has $81 in reserves. It keeps 10% ($8.10), giving it $71.90 of excess reserves.
- Charley's Credit Union makes a $71.90 loan to a customer.
- This creates $71.90 of money. The three banks have created $242.90 worth of money.
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LAW OF COMPARATIVE ADVANTAGE A principle that states that every nation, worker, or production entity has a production activity that incurs a lower opportunity cost than that of another nation, worker, or production entity, which means that trade between the two can be beneficial to both if each specializes in the production of a good with lower relative opportunity cost. This law is most often studied in the confines of international trade, but it also applies to labor and other types of production.
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YELLOW CHIPPEROON
[What's This?]
Today, you are likely to spend a great deal of time wandering around the shopping mall seeking to buy either car battery jumper cables or a dozen high trajectory optic orange golf balls. Be on the lookout for vindictive digital clocks with revenge on their minds.
Your Complete Scope
This isn't me! What am I?
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There were no banks in colonial America before the U.S. Revolutionary War. Anyone seeking a loan did so from another individual.
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"The only place success comes before work is in the dictionary. " -- Vince Lombardi
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BJE
Bell Journal of Economics
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