The Role of Money
The process of creation of money can be shown through different formulas which are used in the calculation of various aspects. The first formula is that of the reserve ratio which is the inverse of deposit or the inverse of money multiplier. This ratio indicates the level of rise or sink of the deposit based on banking activity. The calculation of the deposit inverse yields a decimal value. For instance, for a deposit of $1,000,000, the reserve is calculated to be 0.000001.
From this point it is possible to calculate the excess reserve and the consequence reserve, the formulas to be used are based on the change in monetary supply (M). For example, when a new deposit of $100,000 is used, the value of M will be equivalent to the inverse of reserve multiplied by the change of excess reserve (C). This gives the change of excess reserve as M multiplied by 1/R which is 0.1. The Excess of reserve is calculated through subtraction of the initial reserve from the new reserve which gives (0.1 – 0.000001 = 0.099999). The potential increase in money affects the bank balance sheet through assets and liabilities, where assets added are the two deposits of $1,000,000 and $100,000 while the liabilities are the reserve of $40,000 and the balance brought forward which is $1,060,000.
Using the same formulas, for a deposit of $200 and a reserve ratio of 6%, it can be shown that R = 0.06; D = 1/R = 16.67 and C = M/D = 200/16.67 = 12% or 0.12. The maximum monetary change (M) can be calculated as 1/R multiplied by C. This gives a value of $3,333.33 for a deposit of $200 at a reserve ratio of 0.06. The maximum potential change in reserve can then be calculated as the maximum potential reserve minus the actual reserve = $3333.33 – $200 = $3133.33
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