Macro Foundations · intermediate
What moves on the Money Multiplier diagram
When banks hold more reserves per deposit, the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. shrinks and broad money contracts even with an unchanged base: monetary collapse without any base shrinkage.
The multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. works because banks re-lend most of each deposit.
Panic strikes. Banks fear withdrawals and hold far more reserves against every deposit.
The multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. line rotates down: the same base now supports much less broad money.
This is the Great Depression mechanism: the base grew while broad money collapsed a third. The multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. ran in reverse.
Examiners ask this as: bank run, banking panic, hoard reserves, credit crunch, 1930s banking crisis.
Other scenarios on Money Multiplier