ECON 1020 Lecture Notes - Lecture 75: Excess Reserves, Reserve Requirement, Demand Deposit
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ECON 1020 Full Course Notes
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Individual banks are limited in the amount of money they can create (limited by the value of its excess reserves in creating money) The banking system can lend (create money) by a multiple of its excess reserves. Each bank has a 20% desired reserves ratio: all banks are loaned up (fully loan out all the excess reserves they have, banks lend all of their excess reserves. A bill is found and deposited in a bank. that was currency in circulation, and put into the bank as demand deposit. currency in circulation decreases, and demand deposits increases, making the money supply balanced and no change in supply. Table 12-3: expansion of the money supply by the chartered banking system. Acquired reserves and deposits desired reserves = excess reserves. Monetary multiplier = 1 / desired reserve ratio = 1 / r. Lower desired reserve ratio = lower the multiplier.