Money Creation- 03/27/17

Money Creation- 03/27/17

- A single bank can create $ by the amount of its excess reserves
- The banking system as a whole can create money by a multiple of the excess reserves
- MM * ER = expansion of money
- MM = 1/RRR

New vs. Existing Money
- If the initial deposit in a bank comes from the FED or bank purchase of a bond or other money of the initial deposit in a bank comes from the FED or bank purchase of a bond or other money out of circulation ( buried treasure) the deposit immediately increases the money supply
-The deposit then leads to further expansion of the money supply through the money creation process
-The total change in MS if initial deposit is new money = Deposit + money created by banking system.
-If a deposit in a bank is existing money (already counted in M1, currency or checks) depositing the amount does NOT change the MS immediately because it is already counted in it
-Existing currecy deposited into a checking account changed only the composition of the money supply from coins/paper money to checking account deposits

-       Total change in MS in deposit is existing money = banking system created money only