Money creation formula
- A single bank can create $ by amount of its ER
- banking system as a whole can create $ by a multiple of excess reserves
- MM X ER = Expansion of $
- Money multiplier= 1/RR
News vs Existing $
- Initial deposit in a bank comes from the FED/bank purchase of a bond or other $ out of circulation (buried treasure), the deposit immediately increases the $ supply
- deposit then leads to further expansion of $ supply through the $ creation process
- Total change in MS if initial deposit is new $ = Deposit + $ created by banking system
- if deposit in a bank is existing $ (already counted in M1), depositing the amount does NOT change the MS immediately cs it already counted
- Existing currency deposited into a checking account changes only the composition of the $ supply from coins.paper $ to checking account depositing
- total change in the MS if deposit is existing $ = banking system created $ only
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