Unit 4: Notes and Need-To-Knows 3.5.2015

Creating money (using excess reserves):
Banks want to create a profit. They generate profit by lending the excess reserves and collecting interest. Since each loan will go out into customers and business accounts, more loans are created in decreasing amounts. A rough estimate if of the number of loan amounts creates by any loan is the money multiplier.

Money Multiplier: checkable deposit multiplier, reserve multiplier, loan multiplier.
1 / reserve requirement ratio

Excess reserves are multiplied by multiplier to create new loans for the entire banking supply.

3 types of Multiple Deposit expansion:

1. Calculate initial change in excess reserves. (Amount single bank can loan from initial deposit.
2. Change in loans in the banking system.
3. Change in money supply. Sometimes, type 2 and 3 will have same result.
4. Change in demend deposits.