The Money Multiplier and Reserve Requirement

Mr. Clifford explains the concept of the money multiplier in monetary policy, illustrating how banks create money by lending out deposits. He provides practice questions to calculate changes in the money supply when the Federal Reserve buys bonds and when an individual makes a bank deposit, emphasizing the role of the reserve ratio in determining the money multiplier.

What happens to the money supply when a bank loans out a portion of the deposits?

Describe the process of how banks create money through loans.

What is the concept of the money multiplier in banking?

How does the reserve requirement affect the money supply when the Fed buys bonds?

Explain why the total change in the money supply is not equal to the initial deposit amount.