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Business LibreTexts

15: The Money Supply Process and the Money Multipliers

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    Learning Objectives

    By the end of this chapter, students should be able to:

    • Describe who determines the money supply.
    • Explain how the central bank’s balance sheet differs from the balance sheets of commercial banks and other depository institutions.
    • Define the monetary base and explain its importance.
    • Define open market operations and explain how they affect the monetary base.
    • Describe the multiple deposit creation process.
    • Define the simple deposit multiplier and explain its information content.
    • List and explain the two major limitations or assumptions of the simple deposit multiplier.
    • Compare and contrast the simple money multiplier and the m1 and m2 multipliers.
    • Write the equation that helps us to understand how changes in the monetary base affect the money supply.
    • Explain why the M2 multiplier is almost always larger than the m1 multiplier.
    • Explain why the required reserve ratio, the excess reserve ratio, and the currency ratio are in the denominator of the m1 and m2 money multipliers.
    • Explain why the currency, time deposit, and money market mutual fund ratios are in the numerator of the M2 money multiplier.
    • Describe how central banks influence the money supply.
    • Describe how banks, borrowers, and depositors influence the money supply.

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