AP Macroeconomics Unit 4 - Part 8

https://www.youtube.com/watch?v=1tUC59pz95I&index=7&list=PL2CB281D126F65E26

Money Creation Process

In the money creation process Banks create money by making loans. By the Fed's control of the RR it controls the total amount of money created by the public putting money into the Bank. For this you need the Money multiplier which is 1/RR. You then use your money multiplier and multiply it by the amount of money put in and you get your total money created. This works as you slowly decrease the amount of money by the RR as you can lend the start amount from person to person until it gets to nothing. For example Joe put ins $500, $400 is then used by the Bank and give to Bob, then $320 is lent to Hill and so on and so forth. It then all adds up to the huge number known as the total amount of money created. Assumption that the bank does not hold any extra excess reserves.