New vs. Existing Money

New vs. Existing Money

Single bank can create money by amount of ER

Banking system as a whole can create money by a multiplier of the ER

• MM•ER = expansion of Money
• Money multiplier = 1/RR

If initial deposit in a bank comes from the Fed or a bank purchase of a bond or other money out of circulation (buried treasure), the deposit immediately increases money supply.

The deposit can then lead to further expansion of money supply through money creation process.

• Total change in MS if initial deposit is new money= deposit + money created by banking system.
• If deposit in a bank is already existing money (already counted), depositing amount does not change MS immediately because it is already counted.
• Existing currency deposited into a checking account changes only the composition of money supply from coins/paper money to checking account deposits