is our step 2.Step 2: New loans deposited into the banking system. Hence, the following occurs.After new loans are deposited.Banking System Banking System Assets LiabilitiesAssets LiabilitiesLoans $8.9 M| Deposits $11 Million Loans $8.9 M| Deposits $11.9 MG-Bonds $2 M|G-Bonds $2 Million|Reserves $1.1M| Net Worth $1 MillionReserves $2Million| NW $1 MillionTotal Assets $12 M| Total Liabilities $12TAssets $12.9 M|TLiabilities $12.9 MThe sector is not in balance, for Deposits of 11.9M, only 11.9*0.1=1.19 should be kept as required reserves, the rest can be loaned out. If again, the excess reserves=$2-1.19=$0.81M is loaned out as new loans, we have the following changes in the bank accounts.Step 2: Several more steps in between till .Final StageBanking System Banking System Assets LiabilitiesAssets LiabilitiesLoans $8.9+0.81 M| Deposits $11.9 M Loans $17 M| Deposits $20 MillionG-Bonds $2 M|G-Bonds $2 Million|Reserves $1.19M| Net Worth $1 MillionReserves $2Million| NW $1 MillionTotal Assets $12.9 M| Total Liabilities $12.9Tassets $21 M|TLiabilities $21 MThe initial deposit of $1M=D Reserves generates a multiple expansion in deposits till the D Deposits=(1/RR)*D Reserves=1/0.1*$1M=$10M increase in deposits. (1/RR) is called the money multiplier or the deposit multiplier. Therefore, the new money supply=$0 (CC)+$20 M (Deposits) and old money supply was=1+10=$11M. The increase in Money Supply is $9M.New Loans=D Loans=17-8=$9M, New Reserves=$1M and New Deposits=$10. (They add up!)Alternatively, think of the total deposit creation in terms of new loans. In Step 1, new loans=$0.9M, in step 2, new loans=$0.81M, in step 3, they will be (1-0.1)3 =0.729 and in step 4, (1-0.1)4 =0.6561 so on. Think of this as an infinite series, 1+b+b3+b4+..=1/1-b in the limit. If b=(1-RRR)=1/1-0.1, then the limiting case=1/1-b=1/1-(1-0.1)=1/0.1=10 (voila, the money multiplier). There...
