Unit 4: Money creation formula

3/27/17 

• A single can create money by the amount of excess reserves
• The banking system as a whole can create money by a multiplier of excess reserves
• MM x ER = expansion of money 
• Money multiplier= 1/RR
• New Existing Money

- if the initial deposit in a bank comes from the fed or a 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
-Total change in MS if the initial deposit is new money= deposit+money created by banking system
-if a deposit in a bank is existing money (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 Money supply from coins/ paper money to checking accounts deposits
- Total change in the MS if deposit is existing money = banking system created money only.

3/29/17

Money Creation Process 

-$1000 in cash is deposited in a checking account ->  no immediate change in MS ->Assets
- $1000 fed  purchase of bonds from the public deposited into the checking account ->  immediate increase in MS in $1000 ->  liabilities
- Single bank - amount of money they can loan out of ER
- banking system - can create money by a multiplier of its initial excess reserve (ER x MM)
-  total change in the money supply as a result of the initial deposit.

https://www.youtube.com/watch?v=JG5c8nhR3LE ( A video elaborating on the money creation process)