The document discusses how fractional-reserve banking allows banks to create money through the money multiplier effect. It provides scenarios to illustrate this, showing how an original $1000 deposit can expand the money supply to $5000 through loans made by multiple banks. It also covers theories of money demand, how the Federal Reserve uses tools like open market operations and reserve requirements to influence the money supply, and reasons why the Fed cannot precisely control the money supply.

11. Money creation in the banking system A fractional reserve banking system creates money, but it doesn’t create wealth: bank loans give borrowers some new money and an equal amount of new debt.

13. Solving for the money supply: where

23. Table 18-1: The Money Supply and its Determinants: 1929 and 1933 cr rose due to loss of confidence in banks

24. Table 18-1: The Money Supply and its Determinants: 1929 and 1933 rr rose because banks became more cautious, increased excess reserves

25. Table 18-1: The Money Supply and its Determinants: 1929 and 1933 The rise in cr and rr reduced the money multiplier.

28. A simple portfolio theory

31. Money holdings over the year Average = Y / 4 Y / 2 Y N = 2 Money holdings Time 1 1/2

32. Money holdings over the year Average = Y / 6 Y / 3 Y N = 3 1/3 2/3 Money holdings Time 1

34. Finding the cost-minimizing N N *