The 10 basic rules of economics Definitions Money is a meduim of exchange wherein money represents value.

No bartering nece ssary Governments print or coin money. How much money is in existence is totally up t o the government. In the United States, money is controlled by the Federal Reserve, not the Treasu ry. It's not a simple thing to pay off Treasury bills with new money. Banks increase the money supply by savings and borrowings. When one person puts money into the bank as savings, another person takes the same money out as borr owings. Both people have access to the same dollar. This is how the bank pays interest on savings and CDs A run on the bank occurs when many people come in to the bank to withdraw their money. Since the bank loans out most money deposited with the bank, if too many people come in to get their savings or checking money, the bank can't pay them all. In this day and age, with some customers having millions or even billions in a bank, a run on the bank can happen with just a few customers. That is what happened with Bear Stearns and with Lehman Brothers. Banks have "reserve requirements", which require the bank to keep a portion of t heir total assets as reserves instead of making loans with all of their assets If a bank opens with 1 million dollars, and has a reserve requirement of 10%, ho w much money can it lend? $900,000? $909,090? The answer is $10,000,000! How is that possible? The bank holds the entire $1 million in reserve, and then bo rrows $10,000,000 from other banks and loans that out. Why is that important? If the bank lent out $909,090, then if loans went bad, b anks would be losing deposits, which would be offset by interest from the other loans. However, in the $10,000,000 scenario, the bank has to make payments on i ts loan! The loss is felt immediately, instead of when the depositor asks for h is money back. Rules 1 - Inflation is more money competing for a given amount of goods and services 2 - Deflation is less money comepting for a given amount of goods and services 3 - Inflation is usually caused by governments making too much money 4 - If there is not enough money, prices can drop even though there is no major economic shift. This can be esacerbated by price increases in a necessary commo dity, such as wheat, corn, or oil. 5 - Deflation can occur from a reduction in the cost to make goods and services* , or from money disapperaring from the economy 6 - If costs are dropping and companies are losing money, deflation is occuring. What is causing the deflation is immaterial 7 - Newfangled financial derivatives made it possible to buy more houses, at hig

her prices, and turn home equity into spendable money. The value of US homes wa s 25 trillion in 2008, while the loan capacity of US banks in 2008 was

Alison from Zillow here. To answer your question Zillow calculated the combined value of all homes across the US as of December 31, 2008. Our data shows that th e values amount to about $25.1 trillion. Money multiplier From Wikipedia, the free encyclopedia In monetary economics, a money multiplier is one of various closely related rati os of commercial bank money to central bank money under a fractional-reserve ban king system.[1] Most often, it measures the maximum amount of commercial bank mo ney that can be created by a given unit of central bank money. That is, in a fra ctional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) i s a multiple of reserves; this multiple is the reciprocal of the reserve ratio, and it is an economic multiplier.[2] If banks lend out close to the maximum allowed by their reserves, then the inequ ality becomes an approximate equality, and commercial bank money is central bank money times the multiplier. If banks instead lend less than the maximum, accumu lating excess reserves, then commercial bank money will be less than central ban k money times the multiplier. In the United States since 1959, banks lent out close to the maximum allowed for the 49-year period from 1959 until August 2008, maintaining a low level of exce ss reserves, then accumulated significant excess reserves over the period Septem ber 2008 through the present (November 2009). Thus, in the first period, commerc ial bank money was almost exactly central bank money times the multiplier, but t his relationship broke down from September 2008. For example, with the reserve ratio of 20 percent, this reserve ratio, RR, can a lso be expressed as a fraction RR=1/5 So then the money multiplier, m, will be calculated as: m = 1/(1/5) = 5 This number is multiplied by the initial deposit to show the maximum amount of m oney it can be expanded to.[11] Another way to look at the monetary multiplier is derived from the concept of mo ney supply and money base. It is the number of dollars of money supply that can be created for every dollar of monetary base. Money supply, denoted by M, is the stock of money held by public. It is measured by the amount of currency and dep osits. Money Base, denoted by B, is the summation of currency and reserves. Curr ency and Reserves are monetary policy that can be affected by the Federal Reserv e. For example, the Federal Reserve can increase currency by printing more money and they can similarly increase reserve by requiring a higher percentage of dep osits to be stored in the Federal Reserve.

Mathematically: M=C+D B=C+R M=Money Supply C=Currency D=Deposits B=Money Base R=Reserve So that money supply over money base: M/B = (C+D)/(C+R)\ Multiply the right side by [(D/CR) / (D/CR)]. Since this equals to 1, it is math ematically justified to multiply it to only the right side. Then multiple the right side of the equation by the Money Base So we get: M=B * [(D/R)(1+D/C) / (D/R + D/C)] [(D/R)(1+D/C) / (D/R + D/C)] is the multiplier. Therefore, if money base is held constant, the ratio of D/R and D/C affects the money supply. When the ratio of deposits to reserves (D/R) reduces, the multiplier reduces. Similarly, if the ra tio of deposits to currency (D/C) falls, the multiplier falls as well. [nb 1] The multiplier effect is relevant to considering monetary and fiscal policies, a s well how the banking system works. For example, the deposit, the monetary amou nt a customer deposits at a bank, is used by the bank to loan out to others, the reby generating the money supply. Most banks are FDIC insured (Federal Deposit I nsurance Corporation), so that customers are assured that their savings, up to a certain amount, is insured by the federal government. Banks are required to res erve a certain ratio of the customer's deposits in reserve, either in the form o f vault cash or of a deposit maintained by a Federal Reserve Bank.[1] . Therefor e, if the Federal Reserve Bank (and hence its monetary policy) requires a higher percentage of reserve, then it lowers the bank's financial ability to loan. Implications for monetary policy See also: Monetary policy The multiplier plays a key role in monetary policy, and the distinction between the multiplier being the maximum amount of commercial bank money created by a gi ven unit of central bank money and approximately equal to the amount created has important implications in monetary policy. If banks maintain low levels of excess reserves, as they did in the US from 1959 to August 2008, then central banks can finely control broad (commercial bank) m oney supply by controlling central bank money creation, as the multiplier gives a direct and fixed connection between these. If, on the other hand, banks accumulate excess reserves, as occurs in some finan cial crises such as the Great Depression and the Financial crisis of 2007 2010, th en this relationship breaks down and central banks can force the broad money sup ply to shrink, but not force it to grow. Restated, increases in central bank money may not result in commercial bank mone y because the money is not required to be lent out it may instead result in a gr owth of unlent reserves (excess reserves). This situation is referred to as "pus hing on a string": withdrawal of central bank money compels commercial banks to curtain lending (one can pull money via this mechanism), but input of central ba nk money does not compel commercial banks to lend (one cannot push via this mech anism).

This described growth in excess reserves has indeed occurred in the Financial cr isis of 2007 2010, US bank excess reserves growing over 500-fold, from under $2 bi llion in August 2008 to over $1,000 billion in November 2009. (Note from me - ma tters have been made worse by extra requirements put on by the FDIC; witness wha t happened to ShoreBank. Since the insurers are not the same as the central ban k, the central bank and the insurers can adopt different policies which makes th is situation MUCH worse).