How Banks Create Money - Macro Topic 4.4

Mr. Clifford explains how banks create money through fractional reserve banking. Banks hold a portion of deposits as required reserves and loan out the rest, creating new money. The money multiplier, determined by the reserve ratio, shows how initial deposits can lead to a larger increase in the money supply. Examples illustrate the process, highlighting the difference between bank loans and Federal Reserve actions.

What is the primary function of a bank in relation to customer deposits?

Explain what happens during a bank run and its implications.

How does the required reserve ratio affect the amount of money a bank can loan out?

Describe the process of money creation through loans in a fractional reserve banking system.

What is the money multiplier, and how is it calculated?