Unit 4 March 27

• Money Creation Formula
• A single Bank can create money by the amount of its 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
• New vs. 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, 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 if initial deposit is new money= deposit + money created by banking system
• if a deposit in a bank is existing money, 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 the money supply from coin/paper money to checking account deposit
• total change in MS if deposits is existing money = banking system created money only