Question

Distinguish between primary deposit and derivative deposit.

Answer 1

Consider an initial deposit at a commercial bank. Because of this deposit (called a primary deposit), the bank is holding currency. To make a profit for its investors, the bank loans this money out. The person that gets the loan spends the money which will eventually be deposited in a bank. This second deposit is refered to as a derivative deposit or secondary deposit. Any of these additional derivative deposits increase the amount of the money supply.