Student Name-Gurleen Kaur (GB2S6)

Professor Name- Dr. Madhur

Course Name- Macroeconomics Ecn1202

In this video Mr. Jacob has fully explained the procedure which is followed by the

banks to make money. The main source of making money for banks is the

deposits made to their bank account by the bank customers. After the deposits

are made bank does not hold up that money, they lend it out to other customers

in form of loan, So the difference between the interest earned from the loan

provided to customers and the interest paid to the customers on their deposits is

the main source of income for the banks. After that he explained about the

Required Reserves which is further explained as the minimum deposits that a

bank has to hold by law (the required reserve in United States by Law is 10%)

and the rest of the amount which a bank can loan out is termed as Excess

Reserves. Now for example if a customer makes an initial deposits $100 in his

account the bank will hold up $10 (10% of 100=10) and will lend out the rest of

the $90 as loan, this doesn’t stops here in round 2 as the customer who got the

loan will now spend the money this way the money will make its way back to

some another bank and now this bank will now hold up $9 (10% of 90=9) out of

90 and lend out another $81 be lend out to another customer and this will keep

going until it makes a sum of $900 which we can find out using money multiplier

formula which is 1/reserve ratio