Money Creation Formula

A single bank can create $ by the amount of it's excess reserves.
The banking system as a whole can create $ by a multiple of the excess reserves.
Money Multiplier = 1/RR
New vs. Existing $

• If the initial deposit in a bank comes from the FED or bank purchase of a bond or other money out of circulation, the deposit immediately increases the money supply
• The deposit then leads to further expansion of the money supply through the money creation process
• Total change in MS if initial deposit is new $ = deposit + $ created by banking system
• If a deposit in a bank is existing $ deposting the amount does not change the MS immediately because it is already counted
• Existing currency deposited into a checking account changes only the composition of the money supply from coins/ paper $ to checking account deposits
• Total change in the MS if deposit is existing $ banking system created money only