In the real world though

In the real world though -...

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In the real world though, banks are required to hold significantly less than 100% of the  deposits in reserve. A bank can make loans, which are then redeposited, and can then  be loaned out again; this, in essence, creates money. In this way, any banking system  with less than 100% required reserves effectively increases the money supply. This  system is called fractional reserve banking because banks hold less than 100% or a  fraction of the deposits in reserve.  For example, let's say that an economy has a money supply equal to $1000 and that  there is a reserve requirement of 50%. If all $1000 is deposited into a bank, half of this  amount must be held as reserves to cover withdrawals and half of this amount can be  used to make loans. Say the bank gives out $500 in loans. The money is spent and  eventually redeposited in the bank. Now, the bank has $1500 deposited. Only $1000 of 
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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In the real world though -...

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