Money Creation

• A single bank can create money by the amount of its excess reserves 
• The banking system as a whole can create money by a multiple of the excess receivers 

• MM x ER= Expansion of money 

• Money Multiplier = 1/rr

New vs Existing $ 

• If the initial deposit in a bank comes from the FED or bank purchase of bond or other money out of circulation (buried treasure), the deposits immediately increases the money supply 
• The deposit then leads to further expansion of the money supply through the money creation process 
• Total change in MS if initial deposit is new $= Deposit + $ created by banking system 
• If a deposit in the bank is existing $ (already counted in M1), deposition the amount does NOT change the MS immediately because it is already counted
• Existing currency deposited into a checking account changes only the composition of the money supply from coins/paper $ to checking account deposit 
• Total change in the MS if deposits is existing $ = banking system c