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ECON 1BB3 (535)
Lecture 17

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Department
Economics
Course
ECON 1BB3
Professor
Hannah Holmes
Semester
Winter

Description
Lecture 17 Demonstration • This classroom is a closed economy. I have $50,000 in currency and there is no banking system. • What is the current money supply? M = C + D = $50,000 + $0 = $50,000 100% reserve banking system: M = C + D = $0 + $50,000 = $50,000 • Now, I deposit my $50,000 into a bank. The reserve ratio is 50% • What is the current money supply? M = C + D = $3125 + $50,000 + $25,000 + $12,500 + $6,250 = $96,875 Money Multiplier • Money multiplier: the amount of deposits the banking system generates with each dollar of reserves Money multiplier = 1 / reserve ratio Example Suppose the reserve ratio is 5%. If $100 is deposited into the
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