Reference no: EM132970109

Since demand deposits commonly called checking accounts are a significant part of M1 changes in the levels of checking accounts have a impact on the supply of money. Of course if Professor Stone takes $100 from under his mattress and deposits it in his checking account at Chase the supply of money does not change. But if Chase lends some of this new $100 deposit out to Mr. X, the checking account of Professor Stone will still record a balance of $100 but M1 will have increased by more than the $100 deposit made by Professor Stone. Does this make sense. Bank's do not hold all deposits in reserve only a fraction of deposits are held as reserves.

What is the incentive for banks to lend out deposits?

Banks tend to make medium and long term loans that are financed with short term liabilities. What are these liabilities and what is the risk of this type of financial management?

For those of you who have checking accounts at a bank, what risks do you incur by lending to the bank?

What is a fractional reserve banking system?

Where do banks hold their required reserves and their excess reserves?

Are bank reserves deposited at a Federal Reserve Bank assets or liabilities of the Federal Reserve?

What happens to bank reserves when the Federal Reserve buys assets such as treasury securities from the banking sector?