1.  A single bank can lend one dollar for each dollar of excess reserves  The banking system can lend (create money) by a multiple of its excess reserves 1 ©2013 McGraw-Hill Ryerson Ltd.Chapter 12.6

2.  Multiple-deposit expansion  Assumptions:  20% desired reserves ratio  All banks “loaned up”  Banks lend all of their excess reserves  A $100 bill is found and deposited  Multiple deposits can be created ©2013 McGraw-Hill Ryerson Ltd.2Chapter 12.6

3. Multiple-Deposit Expansion Process Balance Sheet: Chartered Bank A AssetsLiabilities and net worth Cash Reserves $+100 (a 1 )Demand deposits$+100 (a 1 ) – 80 (a 3 )+ 80 (a 2 ) Loans+ 80 (a 2 )– 80 (a 3 ) ©2013 McGraw-Hill Ryerson Ltd.3Chapter 12.6

4. Multiple-Deposit Expansion Process Balance Sheet: Chartered Bank B AssetsLiabilities and net worth Cash Reserves $+80 (b 1 )Demand deposits$+80 (b 1 ) –64 (b 3 )+64 (b 2 ) Loans+64 (b 2 )–64 (b 3 ) ©2013 McGraw-Hill Ryerson Ltd.4Chapter 12.6

5. Multiple-Deposit Expansion Process Balance Sheet: Chartered Bank C AssetsLiabilities and net worth Cash Reserves $+64.00 (c 1 )Demand deposits$+64.00 (c 1 ) –51.20 (c 3 )+51.20 (c 2 ) Loans+51.20 (c 2 )–51.20 (c 3 ) ©2013 McGraw-Hill Ryerson Ltd.5Chapter 12.6

6. Bank (1) Acquired Reserves and Deposits (2) Desired Reserves (3) Excess Reserves (1)-(2) (4) Amount Bank Can Lend; New Money Created = (3) Bank A $100 $20 $80 $80 Bank B $80 $16 $64 $64 Bank C $64 $12.80 $51.20 $51.20 Bank D $51.20 $10.24 $40.96 $40.96 LO4 15-6 ©2013 McGraw-Hill Ryerson Ltd.6Chapter 12.6

7. Bank A Bank B Bank C Bank D Bank E Bank F Bank G Bank H Bank I Bank J Bank K Bank L Bank M Bank N Other Banks Bank (1) Acquired Reserves and Deposits (2) Desired Reserves (Desired Reserve Ratio =.2) (3) Excess Reserves (1)-(2) (4) Amount Bank Can Lend; New Money Created = (3) $100.00 80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 21.99 $20.00 16.00 12.80 10.24 8.19 6.55 5.24 4.20 3.36 2.68 2.15 1.72 1.37 1.10 4.40 $80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.59 $80.00 64.00 51.20 40.96 32.77 26.21 20.97 16.78 13.42 10.74 8.59 6.87 5.50 4.40 17.59 $400.00 The Banking System LO4 15-7 Table 12-3 Expansion of the Money Supply by the Chartered Banking System ©2013 McGraw-Hill Ryerson Ltd.7Chapter 12.6