ECON-315
Chapter-17, Part-3:
The Monetary Base and the Money
Supply
Contents:
The Monetary Base and the Money Supply
The Monetary Base and the Money Supply
A change in reserves precipitates a significant change in the level of loans and checkable deposits in the banking
system.
But the simple deposit expansion multiplier is too simple. In deriving it, we ignored a few important details.
First, we assumed that banks lent out the entirety of the reserves that were not required, leaving no excess
reserves in the banking system.
In fact, banks do hold some excess reserves, in part to protect against unexpected deposit outflows, but also for other
reasons.
Demand for excess reserves can change dramatically and unpredictably.
