The money supply grows because banks are only forced to keep some of their deposits as reserves. Everything else can be lend away.
The formula for the amount of money they create (money multiplier) is as follows:
a = physical currency/bank deposits
w = reserves/deposit accounts
MM = 1+a/w+a
You can interprete w as the rate of reserves. So if we simplify the equation by assuming theres no cash it becomes:
MM = 1/w
So if the reserve ratio is 0.1, the MM would be 10, meaning that the money supply will be 10 times bigger than the monetary base (cash + reserves).
The money supply grows because banks are only forced to keep some of their deposits as reserves. Everything else can be lend away. The formula for the amount of money they create (money multiplier) is as follows:
a = physical currency/bank deposits w = reserves/deposit accounts MM = 1+a/w+a
You can interprete w as the rate of reserves. So if we simplify the equation by assuming theres no cash it becomes:
MM = 1/w
So if the reserve ratio is 0.1, the MM would be 10, meaning that the money supply will be 10 times bigger than the monetary base (cash + reserves).