AP Macroeconomics / Unit 4: Financial Sector
4.4 Banking and the Expansion of the Money Supply
Notes
- Banks keep required reserves and lend out excess reserves.
- Money multiplier $\displaystyle =\frac{1}{\text{reserve requirement}}$.
- Maximum new money from new excess reserves = excess reserves × multiplier.
Practice
Reserve requirement 10%. The money multiplier:
$\displaystyle \frac{1}{0.1}$.
A 1,000-dollar cash deposit with a 20% requirement creates excess reserves of:
Keep 200, lend 800.
The maximum change in loans from that deposit:
$800\times5$.
Ready for more? Take the Unit 4 test.