March 24, 2017

Money Creation Notes 

•  A  single bank create money by the amount of excess reserves.
•  The banking system  as a whole can create money by a multiple of the excess reserves. 
• MM x ER = Expansion of money 
• Money multiplier = 1/RR 

What is the difference between New Money v. Existing Money? 

• 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 expansions of the money supply through the money creation process. 
• The total change in Money Supply 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; ex- currency or checks) depositing the amount does not change the Money Supply 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 account deposits. 
• Total change in Money supply if deposit is existing money = banking system created money only.