Money Multiplier Flow Chart
This helps you apply money multipliers to bond vs. deposit problems.
Assume the RRR=.2
Allison deposits $1,000 in
her checking account at
First National
The Federal Reserve BUYS
a $1,000 bond from First
National
What is the immediate
impact on the money
supply/monetary base?
No change. Cash and
checking are both in the
money supply.
An increase of $1,000. The
$1,000 the Fed uses was
not in the MS already.
First National’s change in
Required Reserves
$200
RRR x deposit
NO CHANGE
Only when deposits
change does THAT bank’s
required reserves change.
First National’s change in
Excess Reserves
$800
.8 x $1000 (why .8? b/c
they must keep .2 and can
lend the rest)
$1,000 all of the money
from the bond sale to the
Fed can now be lent out
Maximum change in the
MS
Due to transaction
1/RRR x change in excess
reserve= change in MS
1/.2
5 x $800=$4,000
1/RRR x change in excess
reserves=change in MS
1/.2
5 x $1,000=$5,000
Amount in checkable
deposits/loans/required
reserves
$5,000 (checkable deposits)
Which includes $4,000 in loans and $1,000 in required
reserves (.2 x checkable deposits of $5,000)