Bank reserves are transformed into checkable deposits through multiple deposit creation. In the simplest case, this process

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Bank reserves are transformed into checkable deposits through multiple deposit creation. In the simplest case, this process is limited by the reserve requirement.

a. When a bank’s reserves increase, the bank makes a loan that becomes a deposit at a second bank.

b. The second bank then makes another loan, but the amount of the loan is limited by the reserve requirement.

c. This process continues until deposits have increased by a multiple that is equal to one over the reserve requirement.

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Money Banking And Financial Markets

ISBN: 9781260226782

6th Edition

Authors: Stephen Cecchetti, Kermit Schoenholtz

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