Banks Create Money M1 Is Term Paper

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If the Federal Reserve requirement is 10%, the money multiplier is 10, meaning that banks can lend out 90% of every dollar they receive as illustrated by the following example of multiple deposit creation (Larsson, 2005):

John deposits $10,000 into his checking account at Bank a.

Bank a Deposit: $10,000

Reserve (10%): $1,000

Lendable Amount: $9,000

Mary borrows $9,000 from Bank a and buys a car. The car dealer then deposits $9,000 into their account at Bank B.

Bank B

Deposit: $9,000

Reserve (10%): $900

Lendable Amount: $8,100

Mark borrows $8,100 from Bank B.

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And has surgery. The doctor then deposits $8,100 into his account at Bank C.

Bank C

Deposit: $8,100

Reserve (10%): $810

Lendable Amount: $7,290

This process continues until the lendable amount is 0. When M1 is measured, the original $10,000 deposit will have created a total of $100,000 in deposits system wide (Larsson, 2005)......

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