Unit 4: Money Creation Process

Unit 4: Money Creation Process

1.)  $1000 in cash deposited into a checking account

2.)  $1000 Fed purchase of Bonds from the public (deposited into a checking account)

                                         ↓                                                                                ↓

No immediate change in MS

Immediate increase in MS of $1000

                                                                                 ↓

Assets Reserves - $1000

Liabilities DD - $1000

Required Reserves = $100 (.10 x $1000 deposit)

Single Bank: Amount of money single bank can create (loan out) = ER

 Actual Reserves - Required Reserves = Excess Reserves

$1000 - $100 = $900

Banking System: can create by a multiple of its initial EXCESS RESERVES

Monetary Policy = 1/RR

1/.1=10

System New $ = Deposit Multiplier x Initial Excess Reserves

10 x $900 = $9000

Total change in money supply as result of deposit

initial deposit + banking system created money = Total change in MS