3/24/17: Money Creation Formula

• A single bank can create $ by the amount of its excess reserves.
• The banking system as a whole can create $ by a multiple of the excess reserves.
• MM x ER = Expansion of Money
• Money Multiplier = 1 / RR (required reserves)

• New vs. Existing $
• New 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 the money supply.
• The deposit then leads to further expansion of the money supply through the money creation process.
• Total change in MS = Initial deposit is new $ = Deposit + $ Created by banking system
• Existing Money
• If a deposit in a bank is existing $ (already counted in MI. Ex: currency or checks) 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 they money supply from coins/paper money to checking account deposits. 



• Total change in MS if deposit is existing money = Banking system created money only.