The importance of bank deposits in the money supply?

Answer 1

By definition of the money supply, bank deposits is a significant portion of it. Regulations only require banks to keep a small portion of deposited money in their reserves, so the money is only represented by those numbers in your bank book. Thus its importance is it expands the money supply by the multiplier effect.

Answer 2

An increase in the amount of deposits allows the banks to loan out more money, thus increasing the amount of money in the economy. When the banks have more to loan, the economy grows, where consumers can purchase more goods. Because of the increase in the goods, firms produce more, which increases the amount of deposits. This is why the Fed watches the economy so closely. If the money supply grows to fast, then the Fed increases the amount of money that the banks have to hold in reserve, effectively decreasing the spending by consumers.

Answer 3

In a closed economy; savings = investment....where investment is a primary driver of growth.

If savings in an open economy is very small; then that country has to borrow from abroad in order to finance domestic investment. In that case; it devalues the domestic currency; which causes the Fed to have to raise rates; which causes a reduction in investment...etc.