Money Creation and Multiple Deposit Expansion

AP Macroeconomics Unit 4 Part 8

              Banks create money by making loans. To calculate how much money is created, you must know use the money multiplier, which is 1/ Required Reserves. If a loan is given out at the amount of $500 and the required reserve is at 20%, you would first use the money multiplier. Plug in 1/ .20 which equals 5 and multiply that by the amount of loans, $500. The amount of money created is $2,500. One thing to remember is, just because the bank loans out $500, it is not guaranteed to increase into $2,500. Banks can hold their excess reserves and prevent the increase of money.