Macro 4.4B - Expansion of the Money Supply - How does the Money Multiplier Work?

[@zenon1177]

Wow this unit is so theoretical. Stuff like this is what makes me miss MCQs during exams 😅

[@ReviewEcon]

This is certainly one of the more tricky topics!

[@fair5075]

4:21 WHATTTT 😢

[@ReviewEcon]

It can be tricky! Practice with the money multiplier game on ReviewEcon.com!

[@laurenlewis5907]

it’s okay we can use a calculator this year!!

[@bullmilkers]

Is there any case when the original amount should be included in new loans?

[@ReviewEcon]

No. :-) Good luck on your exam!

[@amyliu7745]

Do you have any predictions for this year's AP Macro FRQs?

[@ReviewEcon]

My only predictions are AS/AD, monetary and fiscal policy (with loanable funds and reserves market), along with foreign exchange. I also think we could see a GDP deflator or CPI calculation. But I'd be prepared for anything. 😅

[@amyliu7745]

What does "reserves only increased by the amount of the initial deposit" at 7.23 mean? Didn't the total reserves increase by $9000 while the demand deposits initial deposit was $1000?

[@ReviewEcon]

If you watch the reserves side of the balance sheet, you see that the total reserves don't change after the deposit. 90% of the reserves are loaned out, then redeposited each time. The reserves do not change after the initial deposit as a result.

[@reacher22.and.ryan23]

uh how could you tell if the original amount was a loan or not? try

[@ReviewEcon]

It won't be. The first loan will always be the lending of excess reserves.

[@amyliu7745]

If Terry deposits $1000 into his checking account (and that is considered as part of the M1 money supply), why is that not considered new money like how it was for the last bonds ex?

[@ReviewEcon]

It was already money when the $1000 was in his pocket. Now it is a $1000 deposit. So cash decreased by $1000 and deposits increased by $1000. There is no net change in M1 money as a result.

[@myplace571]

hey, where on the balance sheet are FED purchases?

[@ReviewEcon]

If they purchase from a bank, the value comes out of bonds/securities and is added to excess reserves. If they purchase on the open market, the value increases on both sides, deposits on liabilities and reserves (excess and required) on the other side. Good luck!

[@ilikechips2596]

9:35 why do the bonds go into excess reserves?

[@leos8292]

Bonds are not customer deposits so the bank does not need to keep a certain amount in their required reserves. Banks can choose to buy bonds or give out loans (or do nothing) with their excess reserves.

[@insanerobloxjumps2341]

is there another way to tell if the original amount should be added on? it made sense for first part but it was a bit confusing for monetary policy.

[@ReviewEcon]

Some people take the route of "was the original amount what the question asked for?" If so, multiply the entire amount by the multiplier. If not, subtract the reserve requirement first, then multiply what's left by the multiplier. Practice it with the multiplier game and I bet it will get easier. Good luck!

[@insanerobloxjumps2341]

@@ReviewEcon so, if the original amount is what is asked for, you just multiply the money multiplier by that amount that was added, and if it isn't what was asked for, you subtract first then multiply?

[@ReviewEcon]

@insanerobloxjumps2341 correct. 😄 Good luck!

[@insanerobloxjumps2341]

@@ReviewEcon ah. i think it makes sense now. so, for example, if we're using the original method (with the excess reserves), and the fed buys bonds on the open market, we always add the original amount because it is new money that is created. however, if the fed buys bonds from a bond dealer, we don't add for loans. however, we add for demand deposits because the bond dealer will deposit that money, which is a new deposit. we will also add for money supply because new money is created? honestly not sure if any of that is right, sorry

[@ReviewEcon]

Correct, except that the original amount is new money for a bond dealer too (it wasn't money when the central bank had it, but it's now a checkable deposit when the bank dealer gets it). I hope that helps!