Chapter 7: deposit expansion process and

money supply
 Balance sheet

Assets liabilities
• Loans (L) • Demand deposits (DD)
• Reserves ( R)
Required reserves (RR)
Excess Reserves (ER)

TOTAL TOTAL
 Bank A
Assets liabilities
R 100000 DD 1000000
RR 100000 `
ER ------
L 900000

1000000 1000000

Bank A New deposit=100000

Assets liabilities RR for new deposit=100000x10%=10000
R 200000 DD 1000000 ER from new deposit= 90000
RR 110000 DD 100000
ER 90000
L 900000

1100000 1100000
Bank B received deposit of 90000 and the required reserve ratio=10%

This means that Bank b used the excess reserves to give it as loan paid in cash , the bank statement will be
 R = RR +ER •
∆R = ∆ RR + ∆ ER •
∆DD= ∆R * K •
K= (1/r) •
∆ RR = deposit x r •
∆R = ∆ RR + ∆ ER •
∆DD= ∆R * K •
K= (1/r) •
∆ RR = deposit x r •
∆R = ∆ RR + ∆ ER •
∆DD= ∆R * K •
K= (1/r) •
 R = RR +ER •
∆R = ∆ RR + ∆ ER •
∆DD= ∆R * K(1/r) •
 •

The answer:
1- ∆R =- 7000000
2- ∆RR= -7000000 * 10%= -700000
3- ∆ER= -7000000- (-700000) = -6300000
4- Initial change in money supply = -7000000
5- The final change in money supply =-7000000*(1/10%)=-70000000