 A single bank can lend one dollar for each dollar of excess reserves  The banking system can lend (create money) by a multiple of its excess reserves.

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Presentation transcript:

 A single bank can lend one dollar for each dollar of excess reserves  The banking system can lend (create money) by a multiple of its excess reserves 1 ©2013 McGraw-Hill Ryerson Ltd.Chapter 12.6

 Multiple-deposit expansion  Assumptions:  20% desired reserves ratio  All banks “loaned up”  Banks lend all of their excess reserves  A $100 bill is found and deposited  Multiple deposits can be created ©2013 McGraw-Hill Ryerson Ltd.2Chapter 12.6

Multiple-Deposit Expansion Process Balance Sheet: Chartered Bank A AssetsLiabilities and net worth Cash Reserves $+100 (a 1 )Demand deposits$+100 (a 1 ) – 80 (a 3 )+ 80 (a 2 ) Loans+ 80 (a 2 )– 80 (a 3 ) ©2013 McGraw-Hill Ryerson Ltd.3Chapter 12.6

Multiple-Deposit Expansion Process Balance Sheet: Chartered Bank B AssetsLiabilities and net worth Cash Reserves $+80 (b 1 )Demand deposits$+80 (b 1 ) –64 (b 3 )+64 (b 2 ) Loans+64 (b 2 )–64 (b 3 ) ©2013 McGraw-Hill Ryerson Ltd.4Chapter 12.6

Multiple-Deposit Expansion Process Balance Sheet: Chartered Bank C AssetsLiabilities and net worth Cash Reserves $ (c 1 )Demand deposits$ (c 1 ) –51.20 (c 3 ) (c 2 ) Loans (c 2 )–51.20 (c 3 ) ©2013 McGraw-Hill Ryerson Ltd.5Chapter 12.6

Bank (1) Acquired Reserves and Deposits (2) Desired Reserves (3) Excess Reserves (1)-(2) (4) Amount Bank Can Lend; New Money Created = (3) Bank A $100 $20 $80 $80 Bank B $80 $16 $64 $64 Bank C $64 $12.80 $51.20 $51.20 Bank D $51.20 $10.24 $40.96 $40.96 LO ©2013 McGraw-Hill Ryerson Ltd.6Chapter 12.6

Bank A Bank B Bank C Bank D Bank E Bank F Bank G Bank H Bank I Bank J Bank K Bank L Bank M Bank N Other Banks Bank (1) Acquired Reserves and Deposits (2) Desired Reserves (Desired Reserve Ratio =.2) (3) Excess Reserves (1)-(2) (4) Amount Bank Can Lend; New Money Created = (3) $ $ $ $ $ The Banking System LO Table 12-3 Expansion of the Money Supply by the Chartered Banking System ©2013 McGraw-Hill Ryerson Ltd.7Chapter 12.6

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