I.
Demand
deposits are created through the fractional reserve system.
II.
FRS
is when banks withhold some of their deposits in reserve and not loan it all
out.
III.
The
cash kept on hand is required reserves
(RR). The cash loaned out is excess reserves.
IV.
Total
reserves or Actual reserves (TR or AR)= RR + ER
V.
A
single bank can create money by lending out excess reserves
VI.
MM
x ER = the new addition of money (+ER would be new total)
VII.
New
money
a.
Deposit
in a bank comes from a FED, bank purchase of a bond, or other money that's out
of circulation. The deposit increases money supply.
b.
The
deposit then leads to further expansion of the money supply through the money
creation process.
c.
Total
change in money supply if the initial deposit is new money is (deposit plus
money created by banking system)
d.
ER
x MM + RR
VIII.
Existing
money
a.
If
the money is existing money (m1) then the deposit does not immediately change
money supply.
b. Therefore the change in the money supply is only
MM x ER
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