The Money Multiplier
Vložit
- čas přidán 4. 07. 2024
- When you deposit money into a bank, do you know what happens to it? It doesn’t simply sit there. Banks are actually allowed to loan out up to 90% of their deposits. For every $10 that you deposit, only $1 is required to stay put.
This practice is known as fractional reserve banking. Now, it’s fairly rare for a bank to only have 10% in reserves, and the number fluctuates. Since checkable deposits are part of the U.S. money supplies, fractional reserve banking, as you might have guessed, can have a big impact on these supplies.
This is where the money multiplier comes into play. The money multiplier itself is straightforward: it equals 1 divided by the reserve ratio. If reserves are at 10%, the minimum amount required by the Fed, then the money multiplier is 10. So if a bank has $1 million in checkable deposits, it has $10 million to work with for stuff like loans and reserves.
Now, typically, the money multiplier is more like 3, because banks can always hold more in reserves than the minimum 10%. When the money multiplier is higher, like during a boom, this gives the Fed more leverage to move M1 and M2 with a small change in reserves. But when the multiplier is lower, such as during a recession, the Fed has less leverage and must push harder to wield its indirect influence over M1 and M2.
Next up, we’ll take a closer look at how the Fed controls the money supply and how that has changed since the Great Recession.
Subscribe for new videos: bit.ly/1Rib5V8
Macroeconomics Course: bit.ly/2eHWWtC
Next video: bit.ly/2udpA7U
00:00 Fractional Reserve Banking
01:07 Reserve Ratios
01:52 Impacts on the Money Supply
03:18 The Money Multiplier
03:58 The Federal Reserve
05:37 Recessions
the fact that this 6 mins vid explained money multiplier better than my prof did in 30 mins
Lol I don't listen in class, not because my teacher is bad, but rather because I don't feel like sitting through an hour and 30 minutes when we have access to the authors of the textbook explain the concepts in byte sized chunks
Easy to think by image
@The Traditionalist Mind who cares
😂😂
But that is a false theory of money.........😅😅😅😅
I literally saw the light with this video, it has saved my economics mid-term!!
Whoever put Chinese subtitles on this video, appreciate that dude.
At the year 2013 was discovered The Progressive Growth of Money Supply Principle, which say you how the Money Supply must growth, i.e., the quantity of money that market needs: czcams.com/video/iiKr-i022mY/video.html If we increase the money supply by an amount equal to the sum of interest generated by the financial system during the preceding period, the market interest rate will be the natural interest (Wicksell) Thanks to the Progressive Growth of the Money Supply Principle we know today that it is impossible to return to the Gold Standard.
Your welcome
pace for explaining the concept is adorable, luv u grandpa
U made it too simpler.
I couldn't understand it in my last 3 day's class lectures !
Great job💯 thankyou.
this guy is very good at explaining something 95 % of world population doesn't have a clue about ....after watching the video they still can't get it .....
And they won't get it because the video is also incorrect.
This one is a fantastic explanation, strange that had to wait so long for a credible and meaningful video on a relatively common topic.
Thank you so much sir ,I appreciate your lucid way of explaination of this concept .
Thank you so much Professor for crystal clear explanation. This concept is fixed inside my head and never to forget :)
Wonderful! Your channel has the best explanations! Keep going!
That's really a great explanation.
.cover's up the aspect of detailed understanding..Thank you sir
What a beautiful presentation. The best way to explain a concept.
THIS IS INSANE! THEY JUST MAKE MONEY FROM NOWHERE! I'M SO FREAKING IMPRESSED! Also, great job explaining this. I had no grasp of the concept before watching, and now I feel like I could give a lecture on it.
Im afraid its not quite as accurate as you suspect. Richard Werner explains here czcams.com/video/IzE038REw2k/video.html
cheers D
@@mrblack61 you are correct.
"In the modern economy, most money takes the form of bank
deposits. But how those bank deposits are created is often
misunderstood: the principal way is through commercial
banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the
description found in some economics textbooks:
• Rather than banks receiving deposits when households
save and then lending them out, bank lending creates
deposits.
• In normal times, the central bank does not fix the amount
of money in circulation, nor is central bank money
‘multiplied up’ into more loans and deposits." Money creation in the modern
economy
By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
@@mrblack61 Also here: www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp
MONEY ISN'T REAL TO BEGIN WITH.
IT'S A BULLSHIT CONCEPT PEOPLE CREATED
best video on this topic, thank you and looking forward for more content
This is how a professor should be like.... :) You and your team are truly genius...:)
In my country it is called cash reserve ratio... Thanks this video helped me a lot and whole channel as well you made economics fun
Amazing way of teaching ....
Great explanation and presentation of the content! Very easy to understand. Thank you!
Great explanation Prof. Alex!
Luv ur videos, thank you Sir great explanation...can listen to you all day long...
economics cannot be explained any simpler than this...thanks
Wonderful vdeo with animation nd best explanation... cleared my all doubt about money multiplier...thnku sir...
Very well explained sir...thank you !
Excellent explanation, thank you!
Very professional video, thank you.
great visuals!!!!
I never knew how it worked but this is so clear so I know understand it! Thanks
To bad its all a fantasy and its not how it actually works.
"In the modern economy, most money takes the form of bank
deposits. But how those bank deposits are created is often
misunderstood: the principal way is through commercial
banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the
description found in some economics textbooks:
• Rather than banks receiving deposits when households
save and then lending them out, bank lending creates
deposits.
• In normal times, the central bank does not fix the amount
of money in circulation, nor is central bank money
‘multiplied up’ into more loans and deposits." Money creation in the modern
economy
By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
such a helpful video. THANKS!
Great content! Love it!
Thank you very much, this helped me
Best tutorial. Thanks brother
You are wonderful. Thank you for the explanation.
Thank you!
-Roman
To bad its not how it actually works.
"In the modern economy, most money takes the form of bank
deposits. But how those bank deposits are created is often
misunderstood: the principal way is through commercial
banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the
description found in some economics textbooks:
• Rather than banks receiving deposits when households
save and then lending them out, bank lending creates
deposits.
• In normal times, the central bank does not fix the amount
of money in circulation, nor is central bank money
‘multiplied up’ into more loans and deposits." Money creation in the modern
economy
By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
very easy understandable video,,, awsome prof
Great Teacher
thank you for ur explanation prof.
Bank of England has come out with a paper dispelling fractional reserve. Commercial depository institutes create loans endogenously. The loan become the deposit. Loaning reserves is only bank to bank, and not to customers.
mrzack888
And the banks of Germany, Norway.
@@susomedin5770 And McKinsey wrote a paper with the title: *Repeat after me: Banks Cannot And Do Not "Lend Out" Reserves* ...
"Prof. Alex" cant read balance sheets and merely regurgitated dumb textbook stories... Would've been at least funny, if he went on to explain the infinite geometric series of ludicrous micro-credits necessary to get to the limit of the so called "money multiplier"... Of course, he conveniently left that part out and stopped after 810$... Economists wont ever understand that the causality is reversed and how that changes everything. Banks give credit *first* without needing reserves beforehand and can refinance them later if necessary.
The principle behind this argument is simply the act of lending that 90% of reserves that generates money. For as money is being lend out, that increases economic growth and productivity which needs money to keep on growing. Hence it is productivity and service ces which at bottom creates money. If it were otherwise, as the saying goes "only money makes money", that would only increase inflation and the nominal quantity of money, and not the real purchasing power parity.
"In the modern economy, most money takes the form of bank
deposits. But how those bank deposits are created is often
misunderstood: the principal way is through commercial
banks making loans. Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the
description found in some economics textbooks:
• Rather than banks receiving deposits when households
save and then lending them out, bank lending creates
deposits.
• In normal times, the central bank does not fix the amount
of money in circulation, nor is central bank money
‘multiplied up’ into more loans and deposits." Money creation in the modern
economy
By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
@@parityviolation968 The problem is with the liability side of commercial banks. They say to customer that they have their money as deposit - which is a complete lie. This money is not at their disposal, if they cash this deposit out, the bank would experience a bank run. The point is that if all the depositors cannot take money out of the bank at the same time - the deposits should be reported only in the amount of the reserves that are at the central banks and the remaining amount of deposit (which was lent out) should be not reported on liabilities side as deposit, but as invested deposits on liabilities side - so that customers ARE told that this money is still owed to them, but NOT AVAILABLE to them. If this money is AVAILABLE to them, you create money out of thin air. And if you tell them that they can take it anytime they want (without saying B i.e. unless all the customer try to do that), you are lying to them and it is a scam.
Customer should have an option - either his money is deposited and available to them at any time (then the bank is just safekeeping the money and providing security service), the customer would pay a fee. If he does not want to pay a fee he can keep his money at home or allow the bank to lend it out so that he can make an interest on it (by allowing bank to lend it). Or split some money into deposit and investment (loan). But you cannot have the same amount of money as deposit and also loan. Full reserve banking is the solution.
The NCERT book says it's (CDR+1)/(RDR+CDR) where CDR is cash:deposits , RDR is reserve:deposits
Great Video, thank you!
Another excellent video
nice animation. thank you sir!
Thanks grandma
Heya buddy, extremely good stream that you have here. Nice one.
Thank you!
-Roman
@@MarginalRevolutionUniversity Could n't understand from 2:10 - 3:10
because if bank lends money to tyler , tyler will suppose use that whole money for his business,so how come bank has tyler's money as checking account and how can bank give loan to others with his money if he has used that money for his business and not kept in bank???
At the year 2013 was discovered The Progressive Growth of Money Supply Principle, which say you how the Money Supply must growth, i.e., the quantity of money that market needs: czcams.com/video/iiKr-i022mY/video.html If we increase the money supply by an amount equal to the sum of interest generated by the financial system during the preceding period, the market interest rate will be the natural interest (Wicksell) Thanks to the Progressive Growth of the Money Supply Principle we know today that it is impossible to return to the Gold Standard.
@@balmeetsingh5080 Say that Tyler used that money to start a lemonade business. Tyler will buy lemons and other supplies from a number of suppliers. These suppliers then deposit these money they got from Tyler to their bank accounts.
Just one question. What do the banks do if they hold too much in reserve?
Great explanation
20years of schooling and Im learning this now
Because you're not supposed to know how the government and the banks work
amazing video thank you!!!
I wish you were my professor :(, thank you!!
Geat explation dear grandpa
I've heard that the US have changed the rule of 10% reserve some time ago... Is that correct?
Great video
Mind-blowing 👌
Is this related to hypothecation?
Wow, excellent explanation for a novice like me
what happens to money multiplier and reserve ratio during financial crisis
thank you sooooooooooooooooo much
What's the name of the symphony used at the beginning
Could you plz make vedio on other growth models.
wow video.....simply good
So is this what we are seeing with the stock market with high leverage trading accounts?
Thank you
So in larger terms, if the banks are making large amounts of loans using the FRB method, they're giving out money that doesn't exist, so if there was a sudden event that caused a shock and creates a recession where everyone is trying to pull their money from their savings, the banks won't have the money. Is this what happens when the government has to bail them out? Any explanation would help, I'm just a HS senior trying to understand money. Thanks!
That's what was one of the causes of the great depression
Thanks sir...
Can you explain why some channels tell us that banks make money from thin air using accounting techniques and claim to deposit a fraction with the federal reserve? Debunk or confirm this explanation please.
anybody know how much banks pay to create the coins and bills to be use by people ???
Brilliant
Very thankful for this video
Ok professor teach me about money 🤑💰
but what if the person want to withdraw their deposited money and the bank doesnt have it?
Terimakasih ilmunya
But what happens to the money multiplier if say, the European Central Bank were to lower the intrest rate? does it increase because of a greater cash preference or does it decrease because of it?
Theres no money multiplier and interest rates dont directly affect the quantity of money. Richard Werner explains here czcams.com/video/IzE038REw2k/video.html
Can someone explain where did we get $90 if all the $900 were lent out
I still don’t get how 1 create 10$ ?
If A borrows 100 Dollars from B, then is the total money in circulation equal to 200....? Please can anyone verify?
keep upload new videos
i have always hate makroekonomi so just by reading a book cant help me to understands. thanks to prof alex now i understands better.
You don't understand because his info is not accurate.
dude explained it in minutes yet my tutor couldn't in 3 hours 💀
what do u multiply the multiplier by to calculate how much an initial deposit will result in
Resulting Money : Money Multiplier * Initial deposit.
In this case , it's $1000 * 10 ( Initial Deposit * Money Multiplier) = $10,000
Please provide tamil language subtitles also.
That's how easy money works.
Thankyou
¿What I don't get is at wich process is the new money printed?
central bank printing the money...replacing the old bills...or the Commerical Banks will ask for physical cash...
Anyone know the song that starts at 0:28?
what about multiplier effect in economics ;(
thank u queen
Confusing!
Don't quite understand some logics listed below. Hope someone who know well, best with banking background, can enlighten me?
1. "But banks often has higher reserve ratio"
Who set the ratio? Fed or bank? .
Are you trying to say "Bank can reserve money higher than the ratio given by FED"? If so, what is the advantage to a bank for putting more than required money at FED?
2. If the reserves (10% of each deposit by a bank's customer) are kept at FED( I supposed), over some years, the amount would be accumulated very huge, can a bank
claims back or uses these reserves on demand? if yes, then why bank bother to borrow from other bank?
What is the mechanism of money flow between bank and FED in terms of reserve?
If these reserves kept at FED, are they sent to FED once a bank seen deposit comes in?
3. "If Grandma had instead deposit by check, transferring $1000 to to yours, which will not be creating new reserves? "
You means money "Transfer"( or deposited by check) from other bank-account to your bank-account not considered as "deposit" (into your account) ? Confused!
Appreciate you time. Thanks!
I've been listening to a guy called Steve Keen and he makes the following criticism of the money multiplier (in my own words) and I hope Mr. Tabarrok or Mr. Cowen can explain where he's wrong.
If a person wants a loan of $X, what's to stop the bank from just marking up their account by $X and looking for reserves later? After all, this does not change the equity of the bank so no foul play. To see how this works, imagine someone were to come to me and ask for a loan for $100. I could just write them an IOU for $100, and they could use that IOU to buy what they need. Reserves are only useful as a guarantee on the value of the IOU-if someone wants to come in and cash in the IOU, I need some cash in reserve. But once a reputation has been established for redeeming IOUs for real cash, people treat the IOU like it's real money and there's little need to cash in the IOU. (For a bank the IOU is the money that appears in your current/chequeing account. And a bank run is what happens when people lose confidence in the redeemability of the IOUs.)
In principle, if people did all transactions in terms of the IOUs and nobody ever wanted to redeem the IOUs, the bank could operate without any reserves at all*. And the bank is free to print as many IOUs as it wants, constrained only by profit maximisation. In this way, banks do not need to look for reserves when someone asks for a loan. So the recursive series of transactions, each subject to a fixed "reserve ratio," doesn't seem to occur. You could always argue it's "as if" these transactions occur, and define the reserve ratio as Base money/Total money, but that turns the money multiplier into a tautology without any empirical content.
When you view banking this way, it's totally predictable that the massive increase in reserves by the Fed didn't lead to hyperinflation. After all, reserves only exist to convince the public of the redeemability of the banks IOUs, to facilitate the occasional withdrawal, and to facilitate transactions between accounts belonging to different banks (see below). Once these functions have been fulfilled, more reserves doesn't lead to more loans.
*This is not quite true since if a person with a Bank A IOU deposits it in Bank B, Bank B will want to redeem this IOU and there will be a transfer of reserves from Bank A to Bank B. Reserves are needed for this situation.
What are the constraints on the bank? How does the profit maximization work? What is to stop banks lending to everyone?
@@davidglynn3009 Capital requirements. Basel III and the CRR put an ungodly crackdown on retail bank balance sheets in particular.
@@davidglynn3009 There are non other than the banks willingness to lend and the clients willingness to borrow. Richard Werner explains here czcams.com/video/IzE038REw2k/video.html
What do you think money is?
It literally was a IOU for gold and other precious metals...
Just a minor correction: there has been no fractional reserve requirement since March 26, 2020. Essentially a bank can create an infinite amount of money from a $1000 deposit. I say infinite because my math teacher told me that the world will end if I divided by zero.
How can the bank give money to janet when it gave Taylor already
nice
Update: the required reserve ratio has been 0% since March 2020.
I need to open a bank ASAP
hahaha good one
you can
Our professor explains it so cheerfully. But this is the stuff that causes inflation and depressions... and eventually wars.
I didn't get the federal thing
So banks are guilty of electronic counterfeiting? If not wouldn't they be guilty of loaning at interest money that does not exist i.e. perpetrating a con job?
Mick Schmick basically
You hit the nail on the head. “Fractional Reserve Banking” or a more accurate term, electronic counterfeiting, is nothing more than legalized fraud.
It would be counterfeiting if they kept that money for themselves. But once the loans are payed back, that created money disappears. They only keep the interest, as payment for their work and to compensate for the clients that defaulted on their loans.
The money supply is a breathing entity, that expands and contracts. We learned through many mistakes across time that central manipulation of that flow is very important and necessary.
What is COUNTERFEIT?
In criminal law. To forge; to copy or imitate, without authority or right, and with a view to deceive or defraud, by passing the copy or tiling forged for that which is original or genuine. Most commonly applied to the fraudulent and criminal imitation of money. State v. 11c- Kenzie, 42 Me. 302; U. S. v. Barrett (D. C.) Ill Fed. 309; State v. Calvin, It. M. Charlt (Ga.) 159; Mattison v. State, 3 Mo. 421. thelawdictionary.org/counterfeit/
Banks are making legitimate and legal loans through deposits (liabilities) and the excess reserves in their vault (assets).
I have to submit an assignment today, so frustrated!
i have a question - if 900 USD is given to Tyler as a loan, why would that money stay in his account? He is taking that loan for some investment, so bank won't be able to roll that money.
@Swapneel Rao that shows us that bank create money from thin air
@@hantusangap sorry, but could you please elaborate?
@Swapneel Rao they juat printing money.like counterfeit money but it's legal if bank do it, not us.
Tyler is borrowing against himself since he’s the only one in that example and $900 is “created” in the money supply. Overall it’s bad practice because wealth shouldn’t come from nothing
🤓 amazing
So a loan counts as a deposit but not a transfer?
musicbox193 same question 😑
Yes, that right. Loans create deposits but theres no reserve required as this video suggests. Richard Werner explains here czcams.com/video/IzE038REw2k/video.html
Cheers D
No mention of how this printing actively decreases the value of what you get and already have?
Gr8
I never leave money at the bank...well I don't have any money so..