Banking 12: Treasuries (government debt) | Summary and Q&A

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November 8, 2008
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Khan Academy
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Banking 12: Treasuries (government debt)

TL;DR

This video explains the concept of reserve banking, fractional reserves, and introduces the idea of an elastic money supply.

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Key Insights

  • 💵 Reserve banking allows commercial banks to lend out a portion of their deposits, creating money in the form of loans.
  • 🛟 Fractional reserve banking involves maintaining a reserve ratio, such as 50%, between reserves and demand deposits.
  • 🛟 A central reserve bank acts as a lender of last resort and issues currency notes backed by reserves.

Transcript

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Questions & Answers

Q: What is reserve banking and how does it work?

Reserve banking is a system where banks hold a fraction of their deposits as reserves, allowing them to lend out the rest. This system is regulated by reserve requirements set by regulatory authorities.

Q: How are loans created in fractional reserve banking?

Banks create loans by lending out a portion of the deposits they hold. The loan amount becomes a liability for the bank, and the borrower's checking account balance increases as a corresponding asset.

Q: What is the role of a central reserve bank?

A central reserve bank, like the Federal Reserve, acts as a lender of last resort and provides liquidity to banks in case of temporary reserve shortages. It also issues currency notes backed by gold reserves to ensure confidence in the currency.

Q: How does the government's borrowing affect the money supply?

When the government borrows money by issuing treasury securities, it increases the money supply. Investors lend the government money, and in return, receive risk-free IOUs, which are considered as good as cash.

Summary & Key Takeaways

  • The video discusses the concept of reserve banking, where commercial banks hold a percentage of their deposits as reserves.

  • Fractional reserve banking allows banks to leverage their capital by lending out a portion of their deposits.

  • A central reserve bank, like the Federal Reserve, acts as a lender of last resort and issues currency notes backed by gold reserves.

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