THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 449
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CHAPTER 16
TA B L E 1 6 - 1
Bank
The Money Supply Process
417
Creation of Deposits (assuming a 10% desired reserve ratio
and a $100 increase in reserves)
Increase in
Deposits ($)
First Bank
Increase in
Loans ($)
0.00
Increase in
Reserves ($)
100.00
0.00
A
100.00
90.00
10.00
B
90.00
81.00
9.00
C
81.00
72.90
8.10
D
72.90
65.61
7.29
E
65.61
59.05
6.56
F
59.05
53.14
5.91
1000.00
1000.00
100.00
Total for all banks
Following the same reasoning, if all banks make loans for the full amount of
their excess reserves, further increments in chequable deposits will continue (at
Banks C, D, E, and so on), as depicted in Table 16-1. Therefore, the total increase
in deposits from the initial $100 increase in reserves will be $1000. The increase is
tenfold, the reciprocal of the 10% (0.10) desired reserve ratio.
If the banks choose to invest their excess reserves in securities, the result is the
same. If Bank A had taken its excess reserves and purchased securities instead of
making loans, its T-account would have looked like this:
Bank A
Assets
Reserves
Securities
Liabilities
*$10
*$90
Chequable deposits
*$100
When the bank buys $90 of securities, it writes a $90 cheque to the seller of
the securities, who in turn deposits the $90 at a bank such as Bank B. Bank B s
chequable deposits rise by $90, and the deposit expansion process is the same as
before. Whether a bank chooses to use its excess reserves to make loans
or to purchase securities, the effect on deposit expansion is the same.
You can now see the difference in deposit creation for the single bank versus
the banking system as a whole. Because a single bank can safely create deposits
equal only to the amount of its excess reserves, it cannot by itself generate multiple deposit expansion. A single bank cannot make loans greater in amount than its
excess reserves because the bank will lose these reserves as the deposits created
by the loan find their way to other banks. However, the banking system as a whole
can generate a multiple expansion of deposits because when a bank loses its excess
