1. Banks create money by increasing the amount of money in circulation through deposits and loans.

2. The key for banks to create money is that modern banks are part of the reserve system, that is, banks don't have to put all their absorbed deposits in the vault or the central bank, as long as they keep enough reserves according to the statutory reserve ratio stipulated by the central bank (the ratio of the minimum reserve stipulated by the central bank to the deposits kept by banks), and other deposits can be issued as loans. After getting a loan from a commercial bank, customers generally do not withdraw cash, but deposit the loan in a commercial bank with business contacts so as to write a check at any time. The increase of deposits is the increase of money supply in circulation. In this way, the deposit and loan activities of commercial banks will create money, and the amount of money in circulation will increase if the central bank's currency circulation does not increase. The amount of money that a commercial banking system can create is inversely proportional to the statutory reserve ratio and directly proportional to the initial deposit, which is expressed by the formula: D=R/r/r, which shows that the level of the statutory reserve ratio determines the amount of money that a bank can create.

3. The ratio of the amount of money created by the bank to the initial deposit is called the simple money multiplier, which is actually the reciprocal of the statutory reserve ratio. Expressed as:

Typical example: simple money multiplier and calculation of money multiplier

Commercial banks can increase the amount of money in circulation through deposit and loan business. The amount of money that the commercial banking system can create is inversely proportional to the statutory reserve ratio and directly proportional to the initial deposit. The formula is: d = r/r/r.

The ratio of the amount of money created by the bank to the initial deposit is called the simple money multiplier, which is actually the reciprocal of the statutory reserve ratio. Expressed by the formula: m = d/r =1/r.

The central currency only controls the base currency (the sum of the reserves of commercial banks and the cash held by the public). Because commercial banks have the mechanism to create money, the change of base money is not equal to the change of money in circulation. The market money supply will expand or contract many times because of the deposit and loan mechanism of commercial banks. The money multiplier is the ratio of the money supply to the base money. The formula of currency multiplier is: mm = m/h = (Cu+ 1)/(Cu+R).

When calculating simple money multipliers and money multipliers, you can follow the following steps:

Step 1: Determine the known conditions.

Step 2: Determine which formula to use and substitute the known data into the formula for calculation.

Step 3: Answer the questions according to the calculation results.

Example 1: If the initial deposit absorbed by the bank is 1 10,000 yuan and the reserve ratio is 0. 1, calculate the amount of money that can be created by the commercial banking system and the simple money multiplier.

Step by step analysis:

Step 1: R = 1 ten thousand yuan known, R = 0. 1.

Step 2: Determine the calculation formula with D = R/R and M = D/R = 1/R ... Substitute the known data into the formula:

D = r/r =100/0.1=1000 (ten thousand yuan)

m = D/R = 1000/ 100 = 10 .

Step 3: According to the above calculation results, the amount of money that can be created by the commercial banking system is 1000 (ten thousand yuan), and the simple money multiplier is 10.

give it a try

According to the above example, try to do the following questions to improve your ability, and then look at the topic analysis.

It is known that the deposit of an economy is 500 billion, the currency is 654.38+000 billion, and the reserve is 50 billion. Calculate loan-to-deposit ratio, reserve ratio and currency multiplier.