Change_In_Money_Supply

# Change_In_Money_Supply - Change in Money Supply You go to...

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Change in Money Supply You go to the bank and deposit \$100. If the required reserve ratio is 10%, the bank is required by law to keep \$10 (10% * \$100 = \$100*0.1 = \$10) in the bank as required reserves. However, the bank now has \$90 in excess reserves . The bank’s goal is to maximize profit so it loans the \$90 to a customer. That customer takes the money to the bank and deposits it. That bank is required to keep \$9 (\$90*10% = \$9) as required reserves. But this bank has \$81 dollars as extra reserves; the bank loans this out. Whoever gets this \$81 deposits it into the bank… If we stop here, we can see a change in money supply. Generally, we can think of money equal to cash + deposits. (This general idea matches up with M1.) With this definition in mind, (M = C + D) the initial money (\$100 = M = \$100 + 0 to correspond with C + D) has grown. It is now equal to \$171 = (-\$100) + (\$100+\$90+81) If we keep doing this, we see that it will look something like: Change in Money Supply = (-\$100) + (\$100 + \$90 + \$81 + \$72.90 + (1.00 – 0.1)* \$72.90 + … = \$900
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