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How much money is eventually created in this economy?
The money multiplier is the amount of money the banking system generates with each dollar of reserves.
THE MONEY MULTIPLIER Assets Liabilities Second National Bank Reserves $9.00 Loans $81.00 Deposits $90.00 Total Assets $90.00 Total Liabilities $90.00 Money Supply = $190.00! Assets Liabilities First National Bank Reserves $10.00 Loans $90.00 Deposits $100.00 Total Assets $100.00 Total Liabilities $100.00
Money demand has several determinants, including interest rates and the average level of prices in the economy
People hold money because it is the medium of exchange.
The amount of money people choose to hold depends on the prices of goods and services.
Quantity of Money Value of Money, 1 / P Price Level, P 0 1 (Low) (High) (High) (Low) 1 / 2 1 / 4 3 / 4 1 1.33 2 4 Quantity fixed by the Fed Money supply Equilibrium value of money Equilibrium price level Money demand A
Quantity of Money Value of Money, 1 / P Price Level, P 0 1 (Low) (High) (High) (Low) 1 / 2 1 / 4 3 / 4 1 1.33 2 4 Money demand M 1 MS 1 M 2 MS 2 2. . . . decreases the value of mone y . . . 3. . . . and increases the price level. 1. An increase in the money supply . . . A B