Using a simplified balance sheet for the banking industry (meaning equity = 0 and all deposits are liquid enough to count as money) then the balance sheet identity implies that reserves (R) plus loans (L) equal deposits (D). This means the gap equals L, so the diagram illustrates money creation.

I developed a new diagram for teaching monetary aggregates. The definitions for the money supply M = C + D and the monetary base B = C + R give us the following diagram. Can you tell what determines the size of the "???" gap?
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How can the ratio of the money supply to the monetary base be dead? What really died is the assumption that the money multiplier is constant. The ratio remains a useful economic measure. osf.io/preprints/so...

The model with the constant money multiplier is out of fashion since it led so many astray after the financial crisis of 2008, but I like showing my students the empirical money multiplier because it tells such a great story...
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