Money Supply Process

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The money supply, represented by the green sphere, consists of currency in circulation (the opaque green sphere) and bank deposits (the remaining volume). The gold box represents bank reserves, which are not part of the money supply but which serve as the basis for deposit creation. The ratio of reserves to deposits is known as the reserve ratio. A smaller reserve ratio is associated with a greater inflation of bank deposits.

Contributed by: Fiona Maclachlan (March 2011)
Open content licensed under CC BY-NC-SA


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