Types of Deposits and How They Affect the Money Supply

If the initial deposit is just cash from a person: 

• It consists of existing money
• It increases bank reserves
• It doesn't have an immediate impact on the money supply because it is already composed of M1 money

If the initial deposit is a result of the FED purchasing a bond from the public:

• It consists of new money (new money is being created)
• It increases bank reserves
• It has an immediate impact on money supply because money from the Fed puts new money in circulation

If the initial deposit is a result of the bank purchasing a bond from the public:

• It consists of new money (new money is being created)
• It increases bank reserves
• It has an immediate impact on the money supply because money coming from actual reserves puts new money in circulation

Key Principles

• A single bank can create money (through loans) by the amount of excess reserves
• The banking system as a whole can create money by a multiple of the initial excess reserves

Factors That Weaken the Effectiveness of the Deposit Multiplier

• If banks fail to loan out all of their excess reserves
• If bank customers take their loans in cash rather than in new checking account deposits, it creates a cash or currency drain