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Unformatted text preview: checking deposit The immediate change in money supply in USA The bank has to keep at least $100,000 The bank immediately has $900,000 in excess reserve. The Chicago bank can loan out this $900,000 If the reserve requirement = `10% THE MONEY MULTIPLIER Money multiplier : the amount of money the banking system generates with each dollar of reserves. The money multiplier equals 1/( Reserve Ration ) Money multiplier = 1/ 0.1 = 10 Example: The money multiplier = 1/0.1 = 10 Maximum eventual increase in money supply = 1 million + 900,000 + 810,000 The maximum increase = (10)*(original change) M rises by (10)*(1 million) = $10 million If the reserve requirement is 10% Reserve Ratio = 10% Bank and Money Supply Tuesday, April 08, 2008 9:58 AM Macroeconomics Page 1 BANK AND MONEY CREATION Banks may NOT lend out all the excess reserves Borrowers may NOT deposit all loans back into the banking system Macroeconomics Page 2...
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- Spring '08