APMacro: Multiple Expansion of Checkable Deposit


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The banking system magnifies any original excess reserves into a larger amount of newly created checkable deposit money. The money multiplier is similar in concept to the spending multiplier. The money multiplier exists because the reserves and deposits lost by one bank becomes reserves of another bank. It magnifies excess reserves into a larger creation of checkable deposit money.

Money multiplier = 1 / required reserve ratio

By multiplying the excess reserves by the money multiplier, we can find the maximum amount of new checkable deposit money that can be created by the banking system.

Maximum checkable deposit creation = excess reserves X money multiplier

The process we have described is reversible. Just as checkable deposit money is created when banks make loans, checkable deposit money is destroyed when loans are paid off. Loan repayment sets off a process of multiple destruction of money the opposite of the multiple creation process. Because loans are both made and paid off in any period, the direction of the loans, checkable deposits, and money supply in a given period will depend on the net effect of the two processes. If the dollar amount of loans made in some period exceeds the dollar amount of loans paid off, checkable deposits will expand and the money supply will increase. But if the dollar amount of loans is less than the dollar amount of loans paid off, checkable deposits will contract and the money supply will decrease.

Arrows-02-june

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