Chapter 15
Multiple Deposit
Creation and the
Money Supply
Process
Three Players in the Money
Supply Process
1. Central Bank: the Federal Reserve
2. Banks
3. Public: Depositors and Borrowers from banks
Federal Reserve System
1. Conducts monetary policy
2. Clears checks
3. Regulates banks
© 2006 Pearson Addison-Wesley. All rights reserved
15-2
The Fed’s Balance Sheet
Federal Reserve System
Assets
Liabilities
Government Securities
Currency in Circulation
Discount Loans
Reserves
Monetary Base, MB = C + R
© 2006 Pearson Addison-Wesley. All rights reserved
15-3
Open Market Purchase
Banks
Assets
Liabilities
The Fed
Assets
Securities – $100
$100 Reserves + $100
Liabilities
Securities +
Reserves + $100
Result: R $100, MB $100
© 2006 Pearson Addison-Wesley. All rights reserved
15-4
Discount Loans
Banks
Assets
Reserves
+ $100
The Fed
Liabilities
Assets
Liabilities
Discount
Discount
Reserves
Loan + $100 Loan + $100 + $100
Result: R $100, MB $100
© 2006 Pearson Addison-Wesley. All rights reserved
15-5
Deposit Creation: Single Bank
(Open Market Purchase from Bank)
Bank A (Step 1)
Assets
Liabilities
Securities – $100
Reserves + $100
Assets
Reserves
Loans
Bank A (Step 2)
Liabilities
– $100
+ $100
Assets
Reserves
Bank A (Step 3)
Liabilities
+ $100
Deposits
+ $100
15-6
Deposit Creation: Banking System
Assets
Reserves
Assets
Reserves
Loans
Assets
Reserves
Assets
Reserves
Loans
+ $100
+ $10
+ $90
+ $90
+$9
+ $81
© 2006 Pearson Addison-Wesley. All rights reserved
Bank A
Liabilities
Deposits
+ $100
Bank A
Liabilities
Deposits
+ $100
Bank B
Liabilities
Deposits
+ $90
Bank B
Liabilities
Deposits
+ $90
15-7