The Money Multiplier and T-Accounts [AP Macroeconomics Explained]
November 7, 2018
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6:33Now PlayingThe Money Multiplier and T-Accounts [AP Macroeconomics Explained]
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as posted by the channelIn this video Heimler explains the role of banks in the creation of money. Banks are a financial intermediary whose role is to provide liquid assets for illiquid investments. So they loan out money to households and investors above and beyond their reserve requirements.
Doing so creates a multiple of the monetary base. We can see how big a single deposit can grow if we use the concept of the money multiplier. The Money Multiplier is just an equation which gives us a number (the multiplier) by which we can multiply the original deposit and track its growth.
Where does the multiplier come from? The Federal Reserve enforces reserve requirements for banks, meaning that banks are required to keep a certain portion of their deposits as cash in their vaults in case depositors come asking for it.
Another way to see basically the same thing is the T-Account in which banks and businesses can easily understand their assets and liabilities.
If you're in AP Macroeconomics, this is a key concept from Unit 4 of the curriculum. Hope you enjoy!
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