Money creation (03/27/17)

Money Creation Formula

• A single bank can create $ by the amount of its excess reserves

• The banking system as a whole can create $ by a multiple of the excess reserves

• MM x ER = Expansion of money 

• Money Multiplier = 1/RR 

New vs Existing $

• If initial deposit in a bank from FED or bank purchase of a bond or other money out of the circulation ( buried treasure), the deposit is immediately increases the money supply.

• The deposit then leads to further expansion of the money supply through the money creation process.

• Total change in MS if initial deposit is new $ = Deposit + $ created by banking system.

• If a deposit in a bank is existing $ (already counted in M1; ex: currency of checks), depositing the amount does NOT change the MS because it is already counted.

• Existing currency deposited into a checking account changes only the composition of the money supply from coins/paper $ to checking accounts deposits

• Total change in the MS if deposit is existing $ = banking system created money only.

Practice:

http://schools.birdvilleschools.net/cms/lib2/TX01000797/Centricity/Domain/4466/Classroom%20practice%20on%20Banking%20and%20Money%20Creation.pdf