1. The Money Supply Chapter 9

2. 2 ©1999 South-Western College Publishing Table 9.1A The Creation of Money by a Commercial Bank (Panel A) Commercial bank balance sheet before making a loan Assets Loan Reserves Liabilities Deposits2 2 0 2 2 All figures are in millions of dollars

3. 3 ©1999 South-Western College Publishing Table 9.1B The Creation of Money by a Commercial Bank (Panel B) Commercial bank balance sheet after making a loan Assets Loan Reserves Liabilities Deposits2 10 8 All figures are in millions of dollars

4. 4 ©1999 South-Western College Publishing Deriving the Money Multiplier Step 1: Divide the definition of the monetary base by deposits. Step 2: Divide the definition of the money supply by deposits. Step 3: Take the ratio of step 2 to step 1 and substitute the definition of cu and rd. Step 4: This leads to m, the definition of money supply multiplier. 9.6 9.7 9.8 9.9 MB R CU DDD M D CU DDD M = 1 + cu rd + cu MB 1 + cu rd + cu m = + + = = ( ( ) ) TABLE 9.2

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