Banker to the Government and to the banks. Operates foreign exchange reserves. Regulates some aspects of the financial system. It also hires men to wear pink jackets and hang around the lobby in Threadneedle Street. 2 Money creation Most money is in the form of bank deposits.
Key idea is that banks want to keep a reserve ratio of cash to liabilities.
This can be from prudence or legislation. There are clearly many banks, but it's easiest to start by assuming there is only one. This would be even easier to see if the bank just wrote out cheques to its borrowers, which is what really happens. This gives us the money multiplier . Let x be the bank's reserve ratio.