Amount of money also depends on the behaviour of

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amount of money also depends on the behaviour of commercial banks and their depositors How banks influence money supply Demand deposits (in banks) are redeemable in cash on demand. Banks retain a fraction of deposits as reserves (RESERVE RATIO = reserves/deposits ). The remainder they can lend out. When Banks have excess reserves (actual reserve ratio exceeds desired ratio) they are able to make loans and therefore create money => Banks create money by making loans 38
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Assets of Bank Liabilities of Bank Reserves: $1,000 Deposits: $1,000 39 The money supply increases by $1,000 the initial deposit
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Assets of Bank Liabilities of Bank Reserves: $100 (10% deposits) Deposits: $1,000 Loans: $900 40
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Assets of Bank Liabilities of Bank Reserves: $100 (10% deposits) [new reserves: $900] Deposits: $1,000 Loans: $900 (Additional) Deposits: $900 41 The money supply is now $1,900 (total bank deposits) the banks have created money. Since reserves/deposits = 1,000/1,900 = 52.6% ( > 10%) banks can make more loans …..
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Assets of Bank Liabilities of Bank Reserves: $100 (10% deposits) [+ reserves: $90] Deposits: $1,000 Loans: $900 (Additional) Loans: $810 (Additional) Deposits: $900 (Additional) Deposits: $810 42 etc……..
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Assets of Bank Liabilities of Bank Reserves: $1,000 Initial Deposit: $1,000 Loans: $9,000 Subsequent Deposits: $9,000 Total assets: $10,000 Total liabilities: $10,000 43 The money supply has increased by $10,000 10 x the initial deposit
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