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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The process is known as multiple deposit creation or the money multiplier effect and its a fundamental concept in banking and monetary policy Heres a ...View the full answer
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Related Book For 
Money Banking And Financial Markets
ISBN: 9781260226782
6th Edition
Authors: Stephen Cecchetti, Kermit Schoenholtz
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