Question

Describe how a bank increases the money supply. Explain what are a discount loan, a discount rate, and excess reserves. Explain what are required reserve ratio, required reserves, and reserves. Explain what a bank panic and a bank run are. Give an example of how a bank panic happens and when it happened last.

Answer 1

There are several ways to increase the money supply some of which are:
Reducing the Cash reserve ratio (CRR): The cash reserve ratio is the minimum percentage of deposits that banks are required to keep as cash reserves. If there is a reduction in cash reserve ratio, then banks will have more reserves to lend. Hence, there will be increase in money supply.
Open Market operations (OMO): it refers to the sale and purchase of government securities by the central bank to in order to influence the money supply. When a central bank sell securities, it injects money into the economy and when the bank purchases the securities, it contracts the money supply.
Reducing the interest rates: When there is reduction in the interest rates, the banks are capable to lend more and increase investment activity by injecting the money supply.

Discount loan: it is a kind of a short period loan wherein the interest and other charges are deduced from the face value of the loan.
Discount rate: Often known as bank rate, it is the interest rate charged by the central bank on loans given to commercial banks. It is usually done through repo rate.
Excess reserves: Normally in the area of banking, excess reserves are the reserves that are in excess of the reserve requirement set by the central bank.
Required reserve ratio: Also called cash reserve ratio, it is the minimum percentage of deposits that banks are regulated to keep as cash reserves by the central bank.
Required reserves: These are the reserves that the central bank regulates the commercial bank to hold as reserves.
Reserves: In case of banking, reserves are the cash and liquid assets held by the banks.
Bank run: It is the type of bank crisis where in people who hold money in bank suddenly start to withdraw all of their money because of the fear that banks will shut down.
Bank panic: it is an aggravated situation of the bank run that turns into banking crisis because people start to withdraw their money at the same from all the banks. The problem comes when the banks are not able to provide back the deposits as they don't keep all their assets in the form of cash. The last bank panic occurred during the Great depression (1930s)
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