Money Creation Formula

• A Single bank can create $ by the amount of its excess reserves. 
• The banking system as a whole can create $ by a multiple of the excess reserves. 
• MM ( Money Multiplier)  X ER = Expansion of money
• Money Multiplier (MM) = 1/RR 

New vs Existing $

• If the initial deposit in a bank comes from the FED or bank purchase of a bond or other money out of circulation, the deposit immediately increases the money supply. 
• The deposit then leads to further expansion of the money supply through the money creation process 
• Total change in MS if initial deposit is new $ = Deposit (DD) + $  created by banking system (Money Multiplier X ER) *must add the initial deposit as well

• If a deposit in a bank is existing $ (already counted in M1; ex: Currency or checks), depositing the amount does NOT change the MS immediately because it is already counted. 
• Existing currency deposited into a checking account changes only the composition of the money supply from coins/paper $ to checking account deposits
• Total change in the MS if deposit is existing $ = banking system created money only. 

Click the link below to watch a video on money multiplier:

Money and Money Multiplier Effect