ECON 1125 Lecture Notes - Lecture 15: Money Multiplier, Money Supply, Fiscal Multiplier

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whiteturtle462

4 Apr 2016

School

Northeastern University

Department

Economics

Course

ECON 1125

Professor

Xiaolin Shi

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Document Summary

Money is created out of thin air or perhaps more accurately: thin checking accounts! We have to start by knowing something about our banking system and our money supply and once you know this, then it"s easy to see how money is created. Our banking system operates under what is called a fractional reserve system see the story of the goldsmiths in the textbook. Banks only have to hold a fraction of their deposits (reserves) in the bank or at the. The rest of their deposits the bank can lend out to people. The second thing you must recall from chapter 14 is that money is defined as both currency (green dollar bills) and checking accounts. If you recall, m1 is our most liquid measure of money and it is 3 trillion dollars worth of currency and checking accounts. What this means is that banks can create money by creating checking account balances that also count as money!

Related Questions

Simple deposit multiplier

Suppose that Marissa finds $5,000 in cash in a mattress that was given to her and decides to deposit all of the money into her cousin's checking account. If the assumptions of the simple deposit multiplier hold and the required reserve ratio is set at 10%, the banking system will increase/decrease the money supply by ____________. (Note: Currency held by the public is counted in the money supply as part of M1.)

Which of the following assumptions is necessary for a change in checkable deposits to be exactly determined by the simple deposit multiplier?

No borrowers hold money as currency but instead deposit all money in checking accounts.

Borrower default rates are stable.

People's marginal propensity to consume does not rise with income.

If the previous assumption did not hold, the change in the money supply would be ________ than the amount you indicated, because:

If borrower default rates were not stable, then the money supply expansion process would be disrupted

If people's marginal propensity to consume rose with income, they would save less, removing money from the financial system

If people kept some of their new money in the form of currency rather than depositing it in their checking accounts, this money could not be lent out by banks

cyanjellyfish808

1. In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves.

2. If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply.

3. Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply(decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases).

4. If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much?

cyanworm559

1. (0.2 pt) In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves.

2. (0.2 pt) If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply.

3. (0.2 pt) Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply (decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases).

4.(0.2 pt) If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much? (Make sure to show all your work.)

chocolateswan996

ECON 1125 Lecture Notes - Lecture 15: Money Multiplier, Money Supply, Fiscal Multiplier

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