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Marco Economics Help!

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Stamkos1992
Posts: 55 - Karma: 11
Is anyone very familiar with macro? if so can someone explain to me how money is created from a single new deposit? i.e. ..bank of canada buys $100 of government bonds from someone and that person deposits their cheque into their account resulting in assets and liabilities for the bank and excess reserves so it can increase it's loan portfolio ... i just don't understand the process. Thanks if you can help! +k
Mar 30 2011 5:59PM
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feihlination
Posts: 8356 - Karma: 1,084
idk if you mean that, but:

i have 100$ (however i got them), put 90 on bank and spend 10, then the bank is going to lend the 90 to someone else. he again will use the money for something, maybe taking a loan for a house or whatever. the construction company puts 70 or whatever on its bank account and pay 20 to its employees.

the bank lends the money again and in the end result you get the amount of money explained by that formula with the nominal money amount divided by marginal saving rate or whatever, i dont remember exactly.

so in the end, way more than 100$ were spend (my 10 for whatever, 90 for the house, the employees spend 20, and so on until "nothing" is left).

but i am pretty sure that you know that already, maybe i helped you though.

so, the higher the money multiplier the more effective is the central bank and its instruments
Mar 30 2011 6:16PM
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Mr.Turtle
Posts: 3690 - Karma: 96
money multiplier=(1/reserve ratio)
so if they bank has $100 in excess reserves and the rr is 10% then they can loan out $110, which creates $10. also, im pretty sure if the bank would want to sell bonds, not buy them if they're looking to increase their loan possibilities

not really sure if this is what the question is asking and i took macro last semester so don't quote me on this
Mar 30 2011 6:26PM
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Mr.Turtle
Posts: 3690 - Karma: 96
you are correct, i retract my previous post
Mar 30 2011 7:11PM
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VT_FLO
Posts: 3806 - Karma: 147
yeah the equations used are
(E is the sum of all)


M= CU(currency held by the public)+ ED(sum of all deposits)

ER(reserve)= initial investment
ED(deposits)= ER/(reserve deposit ratio)
EL(loans)= ED-ER
Mar 30 2011 7:45PM
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