The Money Multiplier and Reserve Requirement

an initial decreasedecrease in a bank s reserves will decreasedecrease checkable deposits This is a topic that many people are looking for. is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, would like to introduce to you The Money Multiplier and Reserve Requirement . Following along are instructions in the video below:

“I go in statistical inference. This is ac dc econ we re talking about monetary monetary policy. We re talking about money multiplier you re teach you probably already explained the idea of how banks work right when you put money in your bank your bank cannot just hold all that money they hold some of it and they ll own the rest house right. And that eventually makes its way to another bank and that bank holds them event and loans.

It out so banks actually create money the question is how much money do they create well this is called the money multiplier. The money multiplier is won over the reserve ratio. If money comes into a bank. It ll get loaned out in loaned loaned.

Out and keeps getting loaned out some of us get saved their ass gets loaned out right well that happens..

However much money came in multiplied times. The money multiplier tells you how much money actually gets created let s do a couple practice questions make sure you understand the concept all right let s say. The fed buys a hundred billion dollars of bonds. And the reserve requirement is 10.

What does the total change in the money supply. The fed buys bonds it s going to increase in money supply. So they know the answer here is going to be is going to increase hit a certain amount how much is it increase don t say a hundred billion dollars. It s going to get multiplied first hit the calculate the money multiplier right.

It s one over point one or one over one tenth right one over one tenth right equals..

Ten. The money multiplier can be ten any anomaly that comes in the system is going to get multiplied times. Ten. So when the fed buys one hundred million dollars of the bonds and it gets multiplied times.

10. That s going up being a thousand billion or a trillion dollars. A trillion dollars total increase in the money supply. If the government were to do that now let s try this one.

If jill applies 100 cash into her checking account and the reserve requirements..

10 percent. What is the total change in the money supply well we already know the multiplier is 10 and so you want to say this is a thousand. But it s not it s actually only nine hundred what this sucks. Why is it going to be an increase in nine hundred.

I thought you said at most five times ten. The reason why is the original 100 cash is already in the money supply when jill put in 100 cash into the bank. It got multiplied it multiplied into a thousand you re right a thousand. But but the questions asking what is the new amount of money supply right the change.

The plot..

The original hundred was already in the money supply right it was cash right so it s not a thousand. It s only nine hundred of new actual money created now the demand deposits the amount. It s actually in banks is a thousand right because this 100 wasn t in the bank. Before and now it s in so.

There s a thousand dollars demand deposits in banks. But the amount that was created was only nine hundred dollars okay hopefully this makes sense till next time ” ..

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In this video I explain the reserve requirement, the money multiplier, and how money is created. Try it on your own. Good luck!

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AP Macro, macroeconomics, money, multiplier, monetary, reserve requirement, creation

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