CH 15
Multiple Deposit Creation:
A Simple Model
1
 The question now is how deposits are
created?
 When the Fed supplies the banking system
with a ($1) of
additional reserves (through what?),
deposits increase by a multiple of this
amount.
This is called "Multiple deposit creation".
2
Deposit Creation: a single bank:
 Assume that open market purchase of a ($100)
was conducted with bank (A). The bank reserves
increased by ($100).
 How bank (A) will use the ($100) now?
 The ($100) can be seen as an additional reserves to
bank (A); but assume that bank (A) does not want
to hold any excess reserves (since no interest is
paid on reserves):
3
Bank (A)
A
Securities
Reserves
L
-100
+100
4
 there is no increase in checkable deposits,
therefore; required reserve remain the same.
 Bank (A) finds its excess reserves increased by the
($100).
 The bank can now make a loan equal in amount
to the increase in excess reserves ($100).
 Assuming that the borrower opens a checking
account at bank (A)
 recall that this is a case of a single bank;
5
Bank (A)
A
Securities -100
Reserves +100
Loans
+100
L
D +100
6
 Therefore, the bank created a checkable
deposit by lending the ($100).
 Since Checkable deposits are part of money
supply, this action of lending the ($100)
created money!
7
 The borrower will spend the ($100) loan and the
($100) of reserves will leave bank (A).
 Result: A bank cannot safely make loans > its
excess reserves it has before it make the loan.
 in our example, this is equal to ($100) since the
amount of excess reserves the bank hold before
the loan is equal to ($100):
8
Bank (A)
A
Securities -100
Loans +100
L
9
Deposit Creation: the banking system:
 Example: Deposit at bank (A) of ($100), all
Banks hold no excess reserves:
Bank A
A
L
Reserves +100
Deposits +100
10
If the “r” = 10%,
Bank A
A
RR
+10
ER
+90
L
Checkable Deposits +100
11
Since banks don’t want to hold excess
reserves:
Bank A
A
L
RR
+10
Loans +90
Checkable Deposits +100
12
 Two cases:
1- Increase in loans and checkable deposits by
($90)
2- The borrower can spend the ($90):
loans, checkable deposits, and reserves fall by
($90).
13
If the borrower deposited the ($90) into bank
(B):
Bank B
A
L
R +90
Deposits +90
The total increase in banking deposits = $190
14
Applying the (%10) “r” to bank B:
Bank B
A
L
RR +9
ER +81
Deposits +90
15
 Bank (B) will hold no excess reserves:
Bank B
A
RR
+9
Loans +81
L
Checkable Deposits +90
16
The ($81) loan may be spent and then
deposited in bank (A), (B), or another
bank:
Bank C
A
L
RR
+8.1
ER
+72.9
Checkable Deposits +81
17
 Total increase in of checkable deposits
= 100 + 90 + 81 = $271
 If banks lend full amount of excess
reserves,
 Increase in deposits = $10,000
 increase in Loans = $10,000
 increase in reserves = $100
18
Bank
Deposits
loans
Reserves
0
100
0
A
100
90
10
B
90
81
9
C
81
72.90
8.10
..
72.90
65.61
7.29
..
..
..
..
Total all
Banks
1000
1000
100
19
 The same result will apply if the bank
purchased securities
20
 Result: the usage of excess reserves to make loans
or purchase securities leads
to the same effect on deposit expansion
 Remember:
 The single bank case: Can create deposits equal
only to the amount of its excess reserves: cannot
by itself
generate multiple deposit expansion because
when the bank loses its excess reserves, the
reserves may leave
the bank to another.
21
 Single bank cannot make loans greater than its excess
reserves.
 The banking system:
 Can generate multiple deposit expansion because when
the bank loses its excess reserves, the reserves
do not leave the banking system (move from one bank to
another).
 This process continues until the initial increase in
reserves results in multiple increases in deposits:
 Simple Deposit Multiplier: the multiple increase in the
banking system reserves.
22
 Multiple expansion of deposits:
 ∆D=(1/r)(∆R)
 ∆D: change in total checkable deposits in the
banking system.
 r: required reserve ratio.
 ∆R: change in reserves for the banking system.
 In our example:
 ∆D = (1/0.10)(100) = 1,000
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