This is “The Money Supply and the Money Multiplier”, chapter 15 from the book Finance, Banking, and Money (v. 1.1). For details on it (including licensing), click here.
For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. To download a .zip file containing this book to use offline, simply click here.
Has this book helped you? Consider passing it on:
Creative Commons supports free culture from music to education. Their licenses helped make this book available to you.
DonorsChoose.org helps people like you help teachers fund their classroom projects, from art supplies to books to calculators.
Chapter 15 The Money Supply and the Money Multiplier
Chapter Objectives
By the end of this chapter, students should be able to:
- Compare and contrast the simple money multiplier developed in Chapter 14 "The Money Supply Process" and the m1 and m2 multipliers developed in this chapter.
- Write the equation that helps us to understand how changes in the monetary base affect the money supply.
- Explain why the M2 multiplier is almost always larger than the m1 multiplier.
- Explain why the required reserve ratio, the excess reserve ratio, and the currency ratio are in the denominator of the m1 and m2 money multipliers.
- Explain why the currency, time deposit, and money market mutual fund ratios are in the numerator of the M2 money multiplier.
- Describe how central banks influence the money supply.
- Describe how banks, borrowers, and depositors influence the money supply.