Money Multiplier and Banking Concepts

Mr. Clifford explains the concept of monetary policy and the money multiplier. He describes how banks create money by loaning out deposits and how the money multiplier is calculated as one over the reserve ratio. Two practice questions are provided: one involving the FED buying bonds and another involving a personal bank deposit. The video clarifies how these actions affect the total money supply, emphasizing the difference between existing money and newly created money.

What is the primary focus of monetary policy?

• Controlling the money supply

• Managing international trade

• Regulating the stock market

• Setting tax rates

How do banks contribute to money creation?

• By investing in foreign markets

• By printing new currency

• By holding all deposits as reserves

• By loaning out a portion of deposits

What is the role of the reserve ratio in the banking system?

• It determines the interest rate on loans

• It sets the maximum amount banks can loan out

• It controls the amount of currency banks can print

• It dictates the proportion of deposits banks must hold

What is the formula for calculating the money multiplier?

• Reserve ratio divided by one

• One divided by the reserve ratio

• Total deposits divided by loans

• Loans divided by total deposits

If the reserve requirement is 10%, what is the money multiplier?

• 5

• 10

• 15

• 20

How does the money multiplier affect the economy?

• It stabilizes the stock market

• It decreases the money supply

• It amplifies the initial change in the money supply

• It reduces inflation

When the FED buys $100 billion in bonds, how much does the money supply increase if the reserve ratio is 10%?

• $500 billion

• $10 trillion

• $1 trillion

• $100 billion

What happens to the money supply when Jill deposits $100 in her bank account with a 10% reserve requirement?

• It increases by $100

• It increases by $900

• It increases by $1,000

• It does not change

Why is the increase in money supply only $900 when Jill deposits $100?

• The reserve requirement is 20%

• The bank keeps all the money as reserves

• The original $100 was already part of the money supply

• The bank loses $100 in fees

What is the total demand deposit in banks after Jill's $100 deposit?

• $900

• $100

• $1,100

• $1,000