Money & Finance · advanced
What moves on the Money Market diagram
A higher reserve requirement reduces the money multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. and contracts the money supply, shifting the supply line left and raising the equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. interest rate.
Money supply is bigger than the cash the central bank prints, because banks create deposits when they lend.
Regulators raise the share of deposits banks must hold in reserve.
Each dollar of reserves now supports fewer loans, the money multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. shrinks, and the money supply line shifts left.
The interest rate rises without the central bank touching its policy rate at all.
Examiners ask this as: reserve requirement, money supply falls, banks lend less, tightening, macroprudential.
Other scenarios on Money Market