1. Multiple Deposit Creation and the Money Supply Process
Chapter 15
Multiple Deposit Creation and the Money Supply Process

2. 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
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3. The Fed’s Balance Sheet
Federal Reserve System
Assets
Liabilities
Government Securities
Discount Loans
Currency in Circulation
Reserves
Monetary Base, MB = C + R
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4. Open Market Purchase Banks The Fed Result: R $100, MB $100
Assets Liabilities Assets Liabilities
Securities – $100 Securities + $100 Reserves + $100
Reserves + $100
Result: R $100, MB $100
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5. Discount Loans Banks The Fed Assets Liabilities Assets Liabilities
Reserves Discount Discount Reserves
+ $100 Loan + $100 Loan + $ $100
Result: R $100, MB $100
© 2006 Pearson Addison-Wesley. All rights reserved

6. Deposit Creation: Single Bank (Open Market Purchase from Bank)
Bank A (Step 1)
Assets Liabilities
Securities – $100
Reserves + $100
Bank A (Step 2)
Reserves – $100
Loans + $100
Bank A (Step 3)
Reserves + $100 Deposits + $100

7. Deposit Creation: Banking System
Bank A
Assets Liabilities
Reserves + $100 Deposits + $100
Reserves + $10 Deposits + $100
Loans + $90
Bank B
Reserves + $90 Deposits + $90
Reserves + $ 9 Deposits + $90
Loans + $81
© 2006 Pearson Addison-Wesley. All rights reserved