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The Change in Money Supply formula calculates the alteration in the total amount of money available in an economy based on changes in bank reserves, required reserve ratio, and initial deposit amount. It demonstrates how fractional reserve banking affects money creation.
The calculator uses the formula:
Where:
Explanation: The formula shows how changes in bank reserves, combined with the reserve requirement, affect the overall money supply in the economy through the money multiplier effect.
Details: Understanding changes in money supply is crucial for monetary policy, economic forecasting, and analyzing the impact of banking activities on overall economic liquidity and inflation.
Tips: Enter required reserve ratio as a decimal (e.g., 0.1 for 10%), change in bank reserves and initial deposit amount in currency units. All values must be valid (rrr > 0, other values ≥ 0).
Q1: What is the money multiplier effect?
A: The money multiplier effect describes how an initial deposit can lead to a larger increase in the total money supply through the process of banks lending out their excess reserves.
Q2: How does the required reserve ratio affect money creation?
A: A lower reserve ratio allows banks to lend more of their deposits, creating a larger money multiplier effect and increasing the potential money supply.
Q3: What factors can limit the money creation process?
A: Factors include banks choosing to hold excess reserves, borrowers not taking out loans, and cash withdrawals reducing the deposit base available for lending.
Q4: How do central banks use reserve requirements?
A: Central banks adjust reserve requirements as a monetary policy tool to influence the money supply, credit availability, and overall economic activity.
Q5: What's the difference between monetary base and money supply?
A: The monetary base includes currency in circulation and bank reserves, while the money supply includes these plus checkable deposits and other liquid assets.