Thursday, April 16, 2009

two qualifications to deposit creation (4)

When short-term interest rates become very low,and a banker finds that keeping an extra million dollars in idle reserves would not much change his earning position,he is not very anxious to get rid of all excess reserves.But as profit opportunities improve and become less uncertain,he turns more aggressive in putting his idle reserves to work earning a Yield
The possibility that the excess reserves of banks can change over time is an important reminder that there is nothing mechanical and completely accurate about using a.5-to-1 or any other fixed ratio for money creation.
Accordingly,there is nothing automatic about deposit creation.Four factors are necessary:the banks must somehow receive new reserves;they must be willing to make loans or buy securities rather than hold new excess reserves;someone must be willing to borrow or to sell securities;and the public must choose to leave its money on deposit with the banks,not depleting them of reserves.

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