MONEY MULTIPLIER
Someone deposit money in bank and is assume by bank to create money. When you put 1000
dollar in the bank, that is liabilities for the bank, the bank hold that money to you.
Because of great depression, the factory requires all bank have to keep required rate ratio (rrr)
= 10%. So the bank have to keep 10% of the 1000 dollar that positive 100 we call that required
reserve (rr). Money that left over is call excess reserve (er) and that the money, bank can loan
out. That how they make money.
How much money could be create if the bank have 1000 dollar deposit?
We can find out by depositing 900 dollar to loan it and keep 10% that bank loan out remainder
the excess reserves and we can do that over and over again. So that is the simple way call
money multiplier and the money multiplier is one over required rate ratio with the example of
1/0.10 = 10. Any dollar that deposit or any excess reserves can be multiply 10 time. So our
liabillities
assets
Checkable deposit 1000
liabillities
assets
Checkable deposit 1000
Required reserves 100
Excess reserves 900