Economics
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Boundless Economics
The Monetary System
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Economics

Section 3

Creating Money

Book Version 3
By Boundless
Boundless Economics
Economics
by Boundless
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4 concepts
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The Fractional Reserve System

A fractional reserve system is one in which banks hold reserves whose value is less than the sum of claims outstanding on those reserves.

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Example Transactions Showing How a Bank Can Create Money

The amount of money created by banks depends on the size of the deposit and the money multiplier.

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The Money Multiplier in Theory

The money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.

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The Money Multiplier in Reality

In reality, it is very unlikely that the money supply will be exactly equal to reserves times the money multiplier.

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