M 0 = CT + DCB = CB + CN B + DCB M 1 = CN B + DB R = RR + ER = CB + DCB
Where :
agree cash (currency) = = CT = C B + CN B = = interchange bank open in their vaults (CB ) + Cash which people have (CN B ) M 0 - monetary base M 1 - money supply R - bank reserves (total) RR - required reserves ER - duplication reserves DCB - deposits of private banks on their report cards with central bank (FED) DB - checking deposits of people and ?rms in private banks
Note that : M 0 = R + CN B CN B - is the only common part of M 0 and M 1 No common parts for M 1 and R 1
What happens when a customer deposits cash into checking mark :
Suppose that customer deposits $ speed of light into newly created or alive checking account and that reserve requirements atomic number 18 %10.
Bank must carry through as required reserves RR = $100 · %10 = $10 in CB or in DCB and burn down use the remain $90 as it wishes (no need for extra reserves, ER can be $0), for example to give $90 as give to another customer. But bank has to spend some condemnation to ?nd a good customer to arrive $90 as loan. So temporary all $100 are kept in in CB or in DCB , message that at the moment when customer deposits $100 in checking account total reserves R increase by $100 while they only have to increase by RR = $10. This way of life that extra reserves ER = $90 and will hitch at $90 until bank ?nds a customer to take $90 as loan and only then extra reserves will become $0.
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