The Money Creation Process desired, currency, generated, deposits, buying

whaler

Hi All,

Pg 362 of the CFA curriculum on Economics ---->

It says that curency drain ratio is 50 % and the desired reserve ratio is 10%.

However, it goes on to say that of the $100,000 excess reserves (generated by the Fed's buying of securities) that the bank lends, $33,333 drains off and is held outside the bank as currency. The other $66,667 remains in the bank as deposits.

Is this an assumption? cos i thought with the currency drain ratio being 50% the cash drained of should be $50,000.

Maybe I am being a bit thick here. Pls help.

Thanks

evolsteevol

hi guys,

Any views?

Thx

pacmandefense

Sorry bro not there yet but my thinking is that $33,333/$66,666 = .5. With the given information you may calculate the multiplier correcting for currency drain.

Not that were on the subject can someone please post the equation calculating the 'Goldman drain'? Thanx

MonkeyBusiness

The cash drain ratio is the ratio of currency held by individuals to funds deposited in the banking system.

You are interpreting is as the ratio of currency held by individuals to total excess reserves, which is incorrect.

With a 50% cash drain ratio, if there are $100 excess reserves, 33 will be drained from the banking system, and 66 will be deposited in the system. 33 / 66 = 0.5

If the cash drain ratio were 100%, then $50 would be drained from the banking system and $50 would be deposited in the system. 50/50 = 1.

Hope this helps