İKTİSADA GİRİŞ II

Along with traditional definitions above, CBRT also makes a third money stock definition in which total liquid assets in the economy are measured and is called as M3:

M3 = M2 + Repo + Money Market Funds + Debt Securities Issued

In this definition, repo (repurchasing agreements) accounts include funds used as a very short-term financial tool, money market funds include B type liquid investment funds and debt securities issued include bonds and bills issued domestically in TL by banks with maturity up to 2 years.

Fractional reserve banking is the banking practice in which banks hold less reserves than their total liabilities.

There is another question we have to answer here: In that case, what is the total amount of deposit money that can be created until the end of this process? In the consecutive deposit creation process started by an increase in reserves of the banking system, the demand deposit amount that banking system can create is

calculated with simple deposit money multiplier. Within the framework of simplifying assumptions above, simple deposit money multiplier is equal to the reciprocal of required reserve ratio. In our example, as required reserve ratio is 10 percent, then the reciprocal of it will be

Thus, in our example, the deposit money amount which banking system can create with an increase of 1000 TL in reserve is 10 x 1000 TL = 10.000 TL. If we denote the amount of deposit money which banking system can create, that is, change in in demand deposits, as ΔD, change in reserves of banking system as ΔR and required reserve ratio as r, we can calculate the deposit money amount that can be created with the formula:

The term in parenthesis in this equation above is called as simple deposit money multiplier.