Thursday, April 16, 2009

two qualifications to deposit creation (2)

we have been concentrating here on checkable demand deposits. but remember that economists include time deposits in the broad M definition of the money supply! Recall too that time deposits have legal reserve requirements , albeit lower ratios than do demand deposits . Hence, just as some of our original $1000 of reserves will leak out of the banks as currency held by the public , so too will some leak into the time-deposit division of the member bank as needed legal reserves for new time deposits . Obviously , the 5-to-1 amplification of demand deposits applies only to that part of the original reserves which does not leak out of the demand-deposit division in any shape , from , or manner.
- possible excess reserves Our description of multiple-deposit creation has proceeded on the assumption that that the commercial banks sticks fairly close to their legal reserve rations. but there is no reason why bank cannot choose to keep an excess over the legally required amount of reserves. Thus , suppose the original bank receiving a new $1000 deposits had been satisfied to hold $800 of it in excess reserves.

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