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 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 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 or checks), depositing the amount does not change the MS immediately because it is already counted.
- Existing currency deposited into checking account changes only the composition of the money supply from coins/paper $ to checking account deposits
*Total Change in the MS if deposit is existing $ = Banking System Created Money Only
- If 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 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 or checks), depositing the amount does not change the MS immediately because it is already counted.
- Existing currency deposited into checking account changes only the composition of the money supply from coins/paper $ to checking account deposits
*Total Change in the MS if deposit is existing $ = Banking System Created Money Only
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