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Well at a micro level, it is still what happens, the bank doesn't make money appear by magic. The multiplier effect just happens because the original amount of
by cm2187 6y ago
Well at a micro level, it is still what happens, the bank doesn't make money appear by magic.
The multiplier effect just happens because the original amount of cash has been deposited, then lent, then deposited again. So you have the same amount of cash in the system but two deposits, one backed by a loan, the other by cash, and the deposits are treated as "like cash" whereas they are mere IOUs backed by a financial asset.
- jljljl 6y agoA reserve (or government cash deposit) is not technically required for a bank to issue a loan. Its _risky_, since it could lead to a situation where someone tries to cash out and you have nothing to give them, which would destroy your business and reputation as a banker. But if you could make perfect loan decisions and no one comes to redeem their deposit, you wouldn’t need to have any reserves at all. Most regulators require a minimum amount of reserves to prevent instability or bank runs (and to control money supply) That’s the difference, you’re not lending out the original amount of cash, you’re using it as a reserve in case someone asks for their money.