Multiple deposit expansion

Reserve requirement

• The fed requires banks to always have some money readily available to meet the customers need
• The amount set by the fed is the required reserve ratio
• Require reserve ratio-the percent of demand deposit that must not be loaned out
• Usually the required reserve ration is 10%

Money multiplier

• Money multiplier shows a change in demand deposit on loans and eventually the money supply
• 1/required reserve ratio
• Ex if the reserve ratio is 20% then the multiplier is 5 ( 1/.20=5)

3 types of multiple deposit expansion

• Type 1: calculate the initial change in excess reserves ( amount a single bank can loan from the initial deposit)
• Type 2:calculate the change in loans in the banking system
• Type 3: calculate the change in money supply

Example 1: Given a required reserve ratio of 20% assume the federal reserve purchases $100 million worth of US treasury securities on the open market from a primary security dealer. Determine the amount that a single bank can lend from this federal reserve purchase bonds.

• amount of new demand deposit - required reserve= initial change in excess reserve
• $100mill-(.2 X $100mill)
• $100mill-$20 mill= $ 80mill in er

Example 2: given a required reserve of 20% assume the federal reserve purchases $100 million worth of US treasury securities on the open market from a primary security dealer. Determine the maximum total change in loans the banking system from this federal reserve purchases of bonds.

• the inital change in excess reserves (money multiplier)=max change in loans
• $80mill(1/20%)
• $80mill (5)=$400 mill in new loans