1. Money supply: M1 Currency + Demand Deposits or MC DD .: AM - AC +...

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1. Money supply: M1 Currency + Demand Deposits or MC DD .: AM - AC + ADD 2. Total reserves Required reserves + Excess reserves * set by law depend on bank 3. Required reserves R rrDD [1.e. as a proposition of total Deposits] Now, since R- rrDD ⇒ DDR ➜ADD- AR banking systen multiplier. e.g. if FED sets rr - 10% 10. Or, in other words, the banking system can create $10 worth of deposits if its reserves increase by $1. Question- What happens if you deposit your $10 bill in your pocket at your bank? The bank's deposits increase by $10, but its reserves also increase by $10... AR $10 of which the bank needs to keep only $1 in the form of reserves [10% of $10] and on lends the rest. Hence, for our purposes, your $10 deposit has increased the banking system's reserves by $10 we now go on to examine the implications of this move for the whole systen. CASE I a. Bank hold no excess reserves b. You deposit $10 of your cash. c. rr - 102 What happens? The bank gets $10 as an increase in reserves i.e. AR +$10 b. You loose $10 worth of currency i.e. AC -$10 C. Since the whole banking system holds zero excess reserves, ADD (+$10)- 10 x $10-$100 •10 d. Money supply change AN AC +ADD-$10+ $100 +$90 x CASE II a. Bank holds $10 in excess reserves b. You withdraw $10 and put it in your piggy bank at home c. rr = 102 What happens? a. You gain $10 worth of currency i.e. AC - +$10 b. The bank then looses $10 worth of reserves. However, the bank has $10 sitting around as excess reserves which it uses.. AR - $10-$10 - 0 IAR Excess Reserves- Withdrawal] c. Money supply change - AM AC + ADD +$100 $10 CASE III You withdraw $10 and the bank has $5 as excess reserves; rr = 10% Then AR Excess Reserves Withdrawals - $5-$10-$5 . ... ADD-AR-* -$5 - -$50 ..AM AC + ADD +$10-$50-$40 HOMEWORK 1. If rr - 20% and you deposit $100, what happens to ADD, and AM. 2. If rr = 25% and you withdraw $100, what happens to ADD and AM if a. the bank has zero excess reserves b. $50 in excess reserves? 1. Money supply: M1 Currency + Demand Deposits or MC DD .: AM - AC + ADD 2. Total reserves Required reserves + Excess reserves * set by law depend on bank 3. Required reserves R rrDD [1.e. as a proposition of total Deposits] Now, since R- rrDD ⇒ DDR ➜ADD- AR banking systen multiplier. e.g. if FED sets rr - 10% 10. Or, in other words, the banking system can create $10 worth of deposits if its reserves increase by $1. Question- What happens if you deposit your $10 bill in your pocket at your bank? The bank's deposits increase by $10, but its reserves also increase by $10... AR $10 of which the bank needs to keep only $1 in the form of reserves [10% of $10] and on lends the rest. Hence, for our purposes, your $10 deposit has increased the banking system's reserves by $10 we now go on to examine the implications of this move for the whole systen. CASE I a. Bank hold no excess reserves b. You deposit $10 of your cash. c. rr - 102 What happens? The bank gets $10 as an increase in reserves i.e. AR +$10 b. You loose $10 worth of currency i.e. AC -$10 C. Since the whole banking system holds zero excess reserves, ADD (+$10)- 10 x $10-$100 •10 d. Money supply change AN AC +ADD-$10+ $100 +$90 x CASE II a. Bank holds $10 in excess reserves b. You withdraw $10 and put it in your piggy bank at home c. rr = 102 What happens? a. You gain $10 worth of currency i.e. AC - +$10 b. The bank then looses $10 worth of reserves. However, the bank has $10 sitting around as excess reserves which it uses.. AR - $10-$10 - 0 IAR Excess Reserves- Withdrawal] c. Money supply change - AM AC + ADD +$100 $10 CASE III You withdraw $10 and the bank has $5 as excess reserves; rr = 10% Then AR Excess Reserves Withdrawals - $5-$10-$5 . ... ADD-AR-* -$5 - -$50 ..AM AC + ADD +$10-$50-$40 HOMEWORK 1. If rr - 20% and you deposit $100, what happens to ADD, and AM. 2. If rr = 25% and you withdraw $100, what happens to ADD and AM if a. the bank has zero excess reserves b. $50 in excess reserves?

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The image you sent shows a bank holding no extra reserves If you deposit 10 of your cash the banks deposits will increase by 10 but its reserves will also increase by 10 The bank is required to keep a ... View the full answer