SCENARIO 3:Fractional-Reserve Banking Thus,in a fractional-reserve banking system,banks create money. The money supply FIRSTBANK'S now equals $1800: balance sheet The depositor still Assets Liabilities has $1000 in reserves $200 deposits $1000 demand deposits, loans $800 but now the borrower holds $800 in currency. CHAPTER 18 Money Supply and Money Demand slide 8 CHAPTER 18 Money Supply and Money Demand slide 8 SCENARIO 3: Fractional-Reserve Banking The money supply now equals $1800: The depositor still has $1000 in demand deposits, but now the borrower holds $800 in currency. FIRSTBANK’S balance sheet Assets Liabilities reserves $200 loans $800 deposits $1000 Thus, in a fractional-reserve banking system, banks create money. 1