-A single bank can create money, through loans, by the
amount of ER.
-The banking system as a whole can create money by a multiple
(deposition money multiplier) of the initial ER.
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New/ Existing Money
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Bank Reserves
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Immediate change in Money Supply
|
|
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Initial Deposit Cash
(Money created in the banking system only)
|
Existing Money
|
Increase
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No, because only the composition of money changes (cash to
currency)
|
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FED purchase of a bond from the public
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New Money
|
Increase
|
Yes, because money coming from the FED puts new money in
the circulation
|
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Bank Purchase of a bond from the public
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New Money
|
Increase
|
Yes, because money coming from reserves puts new money in
circulation.
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Factors that weaken the effectiveness of the deposit multiplier can be:
1) if the banks fail
to loan out all of their excess reserves.
2) if bank customers
take their loans in cash rather than in a new checking account deposits it
creates a cash or currency drain
The money market (Supply and Demand for money)
The money market (Supply and Demand for money)
-The Demand for money has an
inverse relationship between nominal interest rates and the quantity of money
demanded.
Very great notes, I'm glad that you included a chart that explained the relationship between money, bank reserves, and immediate change in the supply of money when it comes to whether of not cash it is the initial deposit cash, Fed purchasing a bond, or the Bank purchasing the bond. Since I did not have this chart on my notes, I learned that only deposited cash is existing money and that it does not change the money supply since only the composition of money changes while bank/Fed purchasing a bond is new money.
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