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Unit 4: Monetary Creation Process

Money Creation Process: (assume 10% required reserves)

  1. $1000 cash deposited in checking account => no immediate change in MS => Assets // reserves $1000
  2. $1000 FED purchase of bonds from public (deposited into checking account) => immediate increase in MS of $1000 => Liabilities // demand deposits $1000

RR = $100 (.10 x 1000 deposit)

Single Bank: of Money in single bank can create (loan out) = ER

Actual Reserves-Required Reserves=Excess Reserves; $1000-$100=$900 in ER

Banking System: create money by multiple of initial ER; monetary multitude=1/RR=1/.1=10

System New Money=deposit multiplier x initial excess reserves; 10 x $900 = $9000

Total change in MS as result of deposit; initial deposit of right now + Banking system = total change; $1000+$900=> $10000


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