© 2004 Pearson Addison-Wesley. All rights reserved 15-1 Multiple Expansion of Money and Credit: Fed buys bond from bank / bank lends to limit public holds.

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Multiple Deposit Creation and the Money Supply Process
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© 2004 Pearson Addison-Wesley. All rights reserved 15-1 Multiple Expansion of Money and Credit: Fed buys bond from bank / bank lends to limit public holds no currency

© 2004 Pearson Addison-Wesley. All rights reserved 15-2 Simple Deposit Multiplier D = demand deposits r = required reserve ratio RR = required reserves = r x D R = available reserves 1  D =   R r Deriving the formula R = RR = r  D 1 D =  R r 1  D =   R r

© 2004 Pearson Addison-Wesley. All rights reserved 15-3 Deposit Creation: Banking System as a Whole Banking System Assets Liabilities Securities– $100Deposits+ $1000 Reserves+ $100 Loans+ $1000 Critique of Simple Model Deposit creation is slowed if: 1. Some proceeds from loan kept in cash 2. Bank holds some excess reserves

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