How banks create money

How banks create money - same bank, that the bank sets...

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How banks create money.  Consider what happens when the same bank receives a $100,000  deposit from one of its depositors. The bank is required to set aside 10% of this deposit, or $10,000,  as reserves. It then lends out its  excess reserves —in this case, the remaining $90,000 of the initial  deposit. Suppose, for the sake of simplicity, that all borrowers redeposit their loans into the same  bank. The bank thus receives $90,000 in new deposits of which it sets $9,000 aside as reserves and  lends out all of its excess reserves. Suppose again that all borrowers redeposit their loans in the 
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Unformatted text preview: same bank, that the bank sets aside a portion of these deposits, and that the bank then lends out the remainder, which is again redeposited in the bank and so on and so on. This repeated chain of events is summarized in Table 2 . TABLE 2 Multiple Expansion of Deposits Round New deposits New reserves New loans 1 $100,000 $10,000 $90,000 2 90,000 9,000 81,000 3 81,000 8,100 72,900 4 72,900 7,290 65,610 5 65,610 6,561 59,049 . . . . . . . . . + . + . + . $1,000,000 $100,000 $900,000...
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This note was uploaded on 11/18/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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