Banks Money Creation Money Multipliers

Banks and the Creation of Money

Bank Balance Sheets

How do banks “create” money?

Where do the loans come from?

How are the amounts of potential loans calculated?

Bank Liabilities (the right side of the T Account Sheet):

#1 =

#2 =

Key concept for AP concerning Liabilities:

Bank Assets (the left side of the T Account Sheet):

#1=

#2 =

#3 =

#4 =

#5 =

Money Creation (Using Excess Reserves)

The Monetary Multiplier (also known as):

The formula is simple:  1divided by the reserve requirement (ratio)

Excess Reserves are multiplied by the Multiplier

Summary of Items to Know

Bank Balance Sheet =

Liabilities =

Assets =

Assets must Equal Liabilities

DD =

Money is Created through the Monetary Multiplier

ER x 1/RR (Multiplier)=

The Money Supply is affected

Cash from a citizen

ER x Multiplier become

The Fed Buying bonds

IF the Fed buys the bonds IF the Fed buys bonds

Supplemental Note about Bonds