Macro Foundations · intro
What moves on the Money Multiplier diagram
Expanding the monetary base scales up broad money through the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case., to the extent banks actually re-lend the new reserves.
Broad money is the base multiplied through bank lending.
The central bank buys assets and pays with newly created reserves: the base explodes.
The vertical base line marches right, and broad money rises along the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. line.
In practice, post-2008 QE moved broad money far less than the textbook multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. predicted, because banks sat on the reserves. The multiplier is a ceiling, not a law.
Examiners ask this as: quantitative easing, qe, base money explosion, central bank reserves, money printing.
Other scenarios on Money Multiplier