Реферат: What Is Money Essay Research Paper What

be withdrawn at the same time. Thus, they contribute to the money supply by

loaning money. This can be explained by the use of an example: ?100 is

deposited in a bank, which has estimated that only 10% of deposits need to be

kept (this is its reserve ratio). It now has liabilities of ?100, and assets of

?100. In order to keep to its 10% ratio, it loans ?90 to another customer,

keeping ?10 in reserves. The money supply has increased by ?90 ? the original

depositor still has a deposit of ?100, but the borrower now has ?90. This ?90

will then also be deposited, either in the original bank or another one. The

process will then continue again: the bank will hold 10% and loan the rest.

With each deposit and loan, more money is created and enters the money supply,

albeit not infinitely. The formula that calculates the total money created by

an initial deposit is: (1/rr)*D, where

rr is the reserve ratio and D is the initial deposit. In this example, with

rr=0.1 and D=100, an extra ?1000 can be created. The banks have an incentive to

do this because they can charge interest on the loans. The real figure

of rr used to be controlled by the government, but nowadays it has been

deregulated and can be as low as 0.02! This process is called

fractional-reserve banking. There is a risk of a run on the bank occurring,

where too many people try and withdraw funds, thus the bank cannot pay them,

although these are rare in times of stability. Moreover, many central banks are

able to bail out banks in such circumstances.?

The money supply

is thus larger than the monetary base. So long as the money is deposited into

the banking system, it does not matter which bank it is deposited in- the

principle remains the same. This process is known as the money supply

multiplier, which tells how much the money supply will rise if the monetary

base is expanded. The value of the money supply multiplier is going to be

determined by the depositing decisions made by the holds of currency, and the

reserve ratio the banks which to have. It is determined as the ration of cash