Unit IV - Creation of money

• How do banks "create" money?
• By lending out deposits.
• 
• Where do the loans come from? 
• Depositors who take cash and place it in their banks.
• How are the amounts of potential loans calculated?
• By using the balance sheet or T account which consists of liabilities and assets.
• Bank Liabilities (right side of T Account)
1. Demand Deposits (DD) or Checkable Deposits (CD)
• Cash deposits from the public.
• They are a liability because they belong to the depositors and can be withdrawn by the depositors.
2. Owner's Equity
• Values of stock held by the public ownership of bank shares.
• Bank Assets (left side of T Account)
1. The required reserves (RR): A % of DD that must be held in the vault so that some depositors may have access to their money.
2. ER (Excess Reserves): Source of new loans
• DD = RR + ER
3. Property: Bank's holdings
4. Securities (Bonds): Purchased by the bank or new bonds sold to the bank by the Federal Reserve. 
• These bonds can be purchased from the bank turned into cash that immediately becomes available as excess reserves. 
5. Loans: Money creation using excess reserves.
• Key Concept for AP concerning Liabilities
• If the DD comes in from someone's cash holdings, then that DD is already part of the money supply. 
• If the DD comes in from the purchase of bonds (by the FED), then this creates new cash and therefore creates new money supply. 
• Monetary Multiplier: 1 / RR 
• The Monetary Multiplier is multiplied by Excess Reserves to get the change in money supply.