Final System Equilibrium

Now let’s sum up all. the money creation: $1000 + S900 + $810 + $729 + . .. ? Table 25-6 shows that the complete effect of the chain of money creation . S IO,OOO. We can get the answer b)’ arithmetic. by common sense, and by elementary algebra.

Common sense tells us that the process of deposit creation must come to an end only when every bank  the system has reserves equal to of . In all our examples, no cash reserves ever leaked out of the banking system; the money simply went from one set of banks to another set of banks. system will equilibrium when the $1000, f new reserves ‘is all ‘used lip as required reserves on new deposits. In other words, the final equilibrium of the banking system will be the point at . which 10 percent of new.deposits (D) equals the new of $1000. What of D satisfies this The answer is D = $10,000.

Figure 25-5 gives a schematic overview of the process. It shows how $1 of new deposits or reserves, at the upper left, is transformed into $10 of total deposits, or bank money, on the right. Inside the rectangle, which represents the banking system as ~. whole, Bank I receives the initial new deposit. The blue arrows circulating around show how reserves are. redistributed. while the black lines show deposits. Though the chain has many links, each is a dwindling fraction and the whole effect does add up to the total.

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