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Unformatted text preview: The Money Multiplier Checking Account Deposits Currency Currency Reserves Held by Fed M1 The Monetary Base (The Stock of "High Powered" Money) How much money can be created depends upon the amount of bank reserves. The Required Reserve Ratio mandates that a given percentage of deposits be set aside and not loaned out. The larger the excess reserves, the more loans which can be made. Typically, the bulk of required reserves are held at the Federal Reserve Bank in accounts owned by the depositing banks. Everything else the same, the more money in those accounts, the more loans which can be made. Money is created when loans are made. As loans are made, checking account deposits expand. In the above diagram, the horizontal distance on the top of the graph is larger than the horizontal distance at the bottom of the graph. In particular, the graph shows that the distance for currency is the same at both the top and the bottom of the graph but the distance for checking account deposits is larger than the distance for reserves held by the FED. deposits is larger than the distance for reserves held by the FED....
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- Winter '11