Key Principles

- a single bank can create money ( through loans ) by the amount of excess reserves

- the banking system as a whole can create money by a multiple ( deposit or money multiplier ) of the initial excess reserves

- banks loan out all of their excess reserves

- loans are redeposited in checking accounts rather than taken in cash

Initial Deposit : Cash

• the only use of money created by the banking system
• Existing Money
• Bank Reserves , Income ( Liability )
• Immediate Change in Money Supply ?
• No, because the composition of money changes

Initial Deposit : FED Purchase of a Bond from the Public

• New Money
• Bank Reserves , Increase
• Immediate Change in Money Supply ?
• Yes, because money coming from the FED is new money in circulation

Initial Deposit : Bank Purchase of a Bond from the Public

• New Money
• Bank Reserves , Increase
• Immediate Change in Money Supply ?
• Yes, because money coming out of the bank reserves is new money

- Both FED and bank purchase of  bonds from the public can use initial deposit and money created by the banking system

Factors that Weaken the Effectiveness of the Deposit Multiplier :

1. if banks fail to loan out all of their excess reserves , this will cause the multipliers to be weak
1. Ex : FED can change the numbers of monetary multipliers
2. if bank customers take their loans in cash, rather than in new checking ( or checkable ) deposits, this creates cash or currency drain
3.