Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can place reserves, loans, securities, demand deposits and owners’ equity on the correct side of a bank’s balance sheet. (Guide: “What a bank does”; Practice Q6)
- I can explain fractional reserve banking and why a single bank can lend only its excess reserves. (Guide: “Fractional reserve banking”; Practice Q2)
- I can explain how one bank’s loan becomes another bank’s deposit, so lending creates new money in rounds. (Guide: “How the banking system multiplies deposits”, Figure 1)
Calculation
- I can calculate required reserves (rr × demand deposits) and excess reserves (total − required). (Guide: Worked example 1; Practice Q2, Q6(a), Q6(c))
- I can update a balance sheet after a cash deposit, a loan or a withdrawal and check that it balances. (Guide: Worked example 1; Practice Q6(b), Q6(e), Q7(b))
- I can calculate the money multiplier as money supply ÷ monetary base, and its maximum as 1 ÷ rr. (Guide: “The money multiplier”; Practice Q1, Q5)
- I can calculate the maximum change in loans, demand deposits and the money supply, and say which uses the excess reserves and which uses the whole deposit. (Guide: Worked example 2; Practice Q3, Q6(f))
Reasoning
- I can explain why a cash deposit or withdrawal does not change M1 at first, but changes how much banks can lend. (Guide: Worked example 1 “Check”; Practice Q7(a))
- I can work out a multiple contraction of the money supply after a withdrawal. (Practice Q7(b)–(d))
- I can explain why excess reserves held by banks and currency held by the public make the actual expansion smaller than the simple multiplier predicts. (Guide: “Why the simple multiplier overstates expansion”; Practice Q4, Q5(d), Q7(e))
All ticked? Move on to Topic 4.5, The Money Market, or return to the course roadmap.