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Chapter 15 The Money Supply and the Money Multiplier

Chapter Objectives

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

  1. Compare and contrast the simple money multiplier developed in and the m1 and m2 multipliers developed in this chapter.
  2. Write the equation that helps us to understand how changes in the monetary base affect the money supply.
  3. Explain why the M2 multiplier is almost always larger than the m1 multiplier.
  4. 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.
  5. Explain why the currency, time deposit, and money market mutual fund ratios are in the numerator of the M2 money multiplier.
  6. Describe how central banks influence the money supply.
  7. Describe how banks, borrowers, and depositors influence the money supply.