# 10-10-07 - Finish discussion of money creation-market for...

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-market for money -what govt does -fed buying \$100,000 of bonds from 1 bank -increase in “monetary base” -has \$100,000 in excess reserves Step 1 -bank loans \$100,000 Step 2 -100,000 deposited back into bank -Money supply ^ by 100,000 -recall bank(10% reserves),(90% loans) -\$90,000 loaned out Step 3 -90,000 Deposited into bank -money supply ^ 90,000 -81,000 loaned out -how much is created? -100,000 +90,000 +81,000 -=100,000 + (100,000 x .90)+(100,000 .9^2) +(100,000 x .90^3)… =100,000(1+0.90+.90^2 +.90^3….) -let r=increase in monetary base -let P= (1- desired reserve ratio) -then formula b simplifies to R(I+P+P2+P3+…. .) -if P<1 -then … R/(1-P)=R/desired reserve ratio -how much \$ has been created 100,000/.1=1,000,000 -note \$100,000 increase in monetary be \$1,000,000 increase in money supply -increase in monetary base leads to larger increase in money supply -money multiplier=change in monetary created/change in monetary base -in our example: 1,000,000/100,000=10

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10-10-07 - Finish discussion of money creation-market for...

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