BANKS

AND
MONEY
SUPPLY
The Fractional Reserve System
Money Creation
 Fractional Reserve
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System
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Commercial banks in
particular can create deposit
liabilities greater than their
reserves or money in vault.

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 E3
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In the final analysis

The process of multiplying

the banks assets and
liabilities continues until
reserves or vault money is
just enough to meet
current cash demand.

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SL
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E4
Money Creation
The amount of money checks that a commercial bank can cause to
circulate from every peso of reserves is theoretically expressed as
follows :

Therefore:
Where :
m = money supply
R = reserves
L = deposit liabilities

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r = ratio of reserves to deposit liabilities or fractional

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cash demand ratio

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 E5
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R = P100,000
r = .20 (20%)

Money Created = Reserves x m
= P100,000 x 5
= P500,000
Altering the level of reserves and the

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rate of fractional cash demand (r)

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changes the amount of money checks

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that banks can create.

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