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

2. Four Players in the Money Supply Process
1. Central bank: the Fed
2. Banks
3. Depositors
4. Borrowers from banks
Federal Reserve System
1. Conducts monetary policy
2. Clears checks
3. Regulates banks

3. Fed Balance Sheet

4. The Monetary Base
1. MB = C + R = (Fed notes) + (bank deposits) + (Treasury currency) – (coin)
Asset = Liabilities of Fed balance sheet 
2. (Fed notes) + (bank deposits) = (securities) + (discount loans) + (gold and SDRs) + (coin) + (cash items in process of collection) + (other Fed assets) – (Treasury deposits) – (foreign and other deposits) – (deferred-availability cash items) – (other Fed liabs)
Float = (cash items in process of collection) – (deferred-availability cash items)
Substituting 2 into 1 and using definition of float:
MB = (securities) + (discount loans) + (gold and SDRs) + (float) + (other Fed assets) + (Treasury currency) – (Treasury deposits) – (foreign and other deposits) – (other Fed liabs)

5. Summary: Factors that Affect the Monetary Base

6. Control of the Monetary Base
MB = C + R
Open Market Purchase from Bank
The Banking System The Fed
Assets Liabilities Assets Liabilities
Securities – $100 Securities + $100 Reserves + $100
Reserves + $100
Open Market Purchase from Public
Public The Fed
Securities – $100 Securities + $100 Reserves + $100
Deposits + $100
Banking System
Assets Liabilities
Reserves Checkable Deposits
+ $100 + $100
Result: R  $100, MB  $100

7. If Person Cashes Check Public The Fed
Assets Liabilities Assets Liabilities
Securities – $100 Securities + $ Currency + $100
Currency + $100
Result: R unchanged, MB  $100
Effect on MB certain, on R uncertain
Shifts From Deposits into Currency
Deposits – $100 Currency + $100
Currency + $100 Reserves – $100
Banking System
Assets Liabilities
Reserves – $100 Deposits – $100
Result: R  $100, MB unchanged

8. Discount Loans Banking System The Fed
Assets Liabilities Assets Liabilities
Reserves Discount Discount Reserves
+ $100 loan + $100 loan + $ $100
Result: R  $100, MB  $100
Conclusion: Fed has better ability to control MB than R

9. Deposit Creation: Single Bank
First National Bank
Assets Liabilities
Securities – $100
Reserves + $100
Securities – $100 Deposits + $100
Loans + $100

10. 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

11. Deposit Creation

12. Deposit Multiplier If Bank A buys securities with $90 check Bank A
Assets Liabilities
Reserves + $10 Deposits + $100
Securities + $90
Seller deposits $90 at Bank B and process is same
Whether bank makes loans or buys securities, get same deposit expansion

13. Deposit Multiplier Simple Deposit Multiplier 1 D =  R rD
Deriving the formula
R = RR = rD  D
D =  R
D =  R

14. Banking System As a Whole
Assets Liabilities
Securities – $100 Deposits + $1000
Reserves + $100
Loans + $1000
Critique of Simple Model
Deposit creation stops if:
1. Proceeds from loan kept in cash
2. Bank holds excess reserves