Unit 4 - Key Principles

A single bank can create money (through loans) by the amount of excess reserves

The banking system as a whole can create money by a multiple (deposit on a money multiplier) of the initial excess reserves


Banks loan out all of the excess reserves
Loans are redeposited in checking accounts rather that taken in cash 

 

Money that was created by the banking system. 

Factors That Weaken the Effectiveness Of the Multiplier

1. If the Banks fail to loan out all of their excess reserves, FED weak has to change money multiplier
2. If Bank customers take loans in cash rather new checking deposits creates cash or currency drain.