THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 449

CHAPTER 16 TA B L E - Bank The Money Supply Process 417 Creation of Deposits (assuming a 10% desired reserve ratio and a $100 increase in reserves) Increase in Deposits ($) First Bank Increase in Loans ($) 0.00 Increase in Reserves ($) 100.00 0.00 A 100.00 90.00 10.00 B 90.00 81.00 9.00 C 81.00 72.90 8.10 D 72.90 65.61 7.29 E 65.61 59.05 6.56 F 59.05 53.14 5.91 1000.00 1000.00 100.00 Total for all banks Following the same reasoning, if all banks make loans for the full amount of their excess reserves, further increments in chequable deposits will continue (at Banks C, D, E, and so on), as depicted in Table 16-1 Therefore, the total increase in deposits from the initial $100 increase in reserves will be $1000 The increase is tenfold, the reciprocal of the 10% (0.10) desired reserve ratio If the banks choose to invest their excess reserves in securities, the result is the same If Bank A had taken its excess reserves and purchased securities instead of making loans, its T-account would have looked like this: Bank A Assets Reserves Securities Liabilities *$10 *$90 Chequable deposits *$100 When the bank buys $90 of securities, it writes a $90 cheque to the seller of the securities, who in turn deposits the $90 at a bank such as Bank B Bank B s chequable deposits rise by $90, and the deposit expansion process is the same as before Whether a bank chooses to use its excess reserves to make loans or to purchase securities, the effect on deposit expansion is the same You can now see the difference in deposit creation for the single bank versus the banking system as a whole Because a single bank can safely create deposits equal only to the amount of its excess reserves, it cannot by itself generate multiple deposit expansion A single bank cannot make loans greater in amount than its excess reserves because the bank will lose these reserves as the deposits created by the loan find their way to other banks However, the banking system as a whole can generate a multiple expansion of deposits because when a bank loses its excess