Final answer:
The answer provides the formula D = E x 1/RR for maximum checkable deposit creation, with 'D' being the total deposits, 'E' the excess reserves, and 'RR' the reserve requirement ratio. It explains the application of the money multiplier in the M1 money supply expansion within the banking system.
Step-by-step explanation:
According to McConnell, the formula for the maximum checkable deposit creation can be illustrated simply by D = E x 1/RR, where 'D' represents the total deposit creation, 'E' is the excessive reserves, and 'RR' stands for the reserve requirement ratio. This is an application of the money multiplier formula which is pivotal in the banking system for calculating the potential total of checkable deposits that banks can create from a given amount of excessive reserves. The money multiplier effect explains how the banking system can expand the M1 money supply, which includes cash, coins in circulation, checkable bank deposits, and traveler's checks.
As banks make loans from their excess reserves, these loans can increase the number of deposits in the banking system. The money multiplier formula essentially tells us how much the money supply can increase if banks lend out all of their excess reserves. It's important to remember that the actual deposit creation may be less than the maximum potential, as banks might choose to hold onto more than the minimum reserves, and some money may be held by the public as cash rather than deposits.