Unit 4: Money Creation Formula 3/27/17

• 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 * ER = Expansion of money
• Money Multiplier = 1/RR

New vs. Existing $:

• If the initial deposit in a bank comes from the Fed or bank purchase or a bond or other money out of circulation, the deposit 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), depositing the amount does NOT change the MS immediately because it is already counted.
• Existing currency deposited into a checking account changes only the composition of the MS from coins/paper $ to checking account deposits.
• Total change in MS if deposit is existing $ = banking system created money only.

LINK:

http://www.csun.edu/sites/default/files/macro6_0.pdf