Chapter 13: Multiple Deposit Creation and the Money Supply Process

Multiple deposit creation: a simple model
1. when fed supplies banking system with $1 of additional reserves, deposits increase by a multiple of this amount

Deposit creation: The banking system
1. A bank cannot safely make loans for an amount greater than the excess reserves it has before it makes the loan
2. whether a bank chooses to use its excess reserves to make loans or to purchase securities, the effect on deposit expansion is the same
3. multiple increase in deposits generated from an increase in the banking system's reserves is called the simple deposit multiplier: (change in checkable deposits in the banking system) = (required reserve ratio)(change in reserves for the banking system)
4. Critique: fed has no complete control over the level of checkable deposits