Unit 4: (3/17/2015)

Key principles
- a single bank can create money through loans by the amount of excess reserves
- the banking system as a whole can create money by a multiple (deposition money multiplier) of the initial excess reserves.

Initial deposit	New/existing money	Bank reserves	Immediate change in M.S
Cash	Existing	Up	No; because the composition of M1 money changes cash to currency.
FED Purchase of a bond from the public	New	Up	Yes; because money coming out of the FED is new Money in circulation
Bank purchase of a bond from the public	New	Up	Yes; because money coming from bank reserves is new money in circulation.

Factors that weaken the effectiveness of the deposit multiplier:

1. if bankers fail to loan out all their excess reserves

2. if bank customers take their loans in cash rather than new checking account deposits it creates a cash currency drain.

Money market

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.