[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Alex] Now that we know\Nhow money is defined,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,we'll learn how banks\Ncan affect the supply of money
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,through fractional reserve banking.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Let's imagine\Nthat you graduate from college,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and your grandma gives you\N$1,000 in cash --
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,that she's been saving\Nunder her mattress since the 1970s --
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and you deposit this cash\Nin your checking account.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,What does the bank do\Nwith your money?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Does it sit in a vault\Nwith your name on it?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,No.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Banks lend most of your money\Nto people who want to borrow.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Banks keep in reserve\Nonly a fraction of your money --
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,money they keep in cash\Nfor the ATM,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,or to meet withdrawal demands.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,This is why this system is known\Nas "fractional reserve banking."
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,So what fraction of your deposit\Ndo banks keep in reserve?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Well, large banks\Nin the United States
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,must keep in reserve at least $1\Nfor every $10 in deposits,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,or we say large banks are required
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to have a reserve ratio\Nof at least 10%.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,But banks often have\Nhigher reserve ratios
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,depending upon how liquid\Nthat they want to be.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,If a bank is worried
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,that its customers might withdraw\Nmost of their money,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,or if bank loans are just\Nnot that profitable,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,banks will hold more reserves.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,So the reserve ratio\Ncan be greater than 10%
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and it can change over time.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Because of\Nfractional reserve banking
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,the banking system has a big effect\Non the supply of money.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Let's see how.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Suppose that your bank keeps 10%\Nof your $1,000 deposit,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,or $100 as reserve.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And suppose it lends out 90%,\Nor $900, say to Tyler,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,who's interested\Nin starting a business.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,That $900 loan is credited\Nto Tyler's checking account.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,So now there's $1,900\Nin new deposits,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and since checkable deposits\Nare part of the money supply,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,the money supply has increased.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And it doesn't stop there.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Suppose that the bank holds 10%\Nof Tyler's deposit in reserve,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and it lends out 90%, or $810,\Nsay to Janet.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Now deposits have increased\Nby $2,710.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And suppose that 10%\Nof Janet's money is held in reserve,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and the rest is lent out.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And so this process continues.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And as the banks make more loans,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,that increases\Nthe number of deposits,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,which increases\Nthe number of loans,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,which increases\Nthe number of deposits.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,So how much money\Ndo we ultimately end up with?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,You can figure that out
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,using what's called\Nthe "money multiplier."
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,The money multiplier tells us
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,how many dollar's worth\Nof deposits are created
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,with each additional dollar\Nof reserves.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And the money multiplier is simple.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,It's just 1 divided\Nby the reserve ratio.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,So if the reserve ratio is 10%,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,the money multiplier is\N1 divided by 0.1, or 10.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And what that means is that\N$1 in new reserves
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,will ultimate lead,\Nthrough the multiplier process,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to $10 in additional money
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,as measured by, say, M1 or M2.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Now let's clarify\Nour previous example,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and why it was key that Grandma\Nwas pulling cash
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,from under her mattress.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,If Grandma had instead\Ngiven you a check for $1,000,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,she'd simply be transferring money\Nfrom her account to yours --
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,which would not be creating\Nnew reserves,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and so we wouldn't see\Nthis multiplier effect.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And, actually, the key player here\Nisn't Grandma --
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,it's Uncle Sam, the Federal Reserve.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And with the click\Nof a computer button
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,create new money,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,new money which you can use\Nto buy financial assets,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,thus injecting new reserves\Ninto the banking system.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,But the Feds' control
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,over the money-supply process\Nis indirect.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,If banks hold the minimum amount\Nof required reserves --
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,10% as we assumed earlier --
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,then the money multiplier\Nwill be close to 10.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And if this is the case,\Nthe Fed will have a lot of leverage
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to move M1 and M2\Nwith a small change in reserves.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,But in normal circumstances,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,the actual money multiplier\Nis closer to 3.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,How come?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Well, remember, banks can't hold\Nless than 10% in reserve.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,They can always hold more.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And the more banks hold in reserve,\Nthe lower the money multiplier.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,So it's important to understand
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,that the money multiplier\Nisn't a fixed number,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and the multiplier process\Nisn't a mechanical relation.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Here's another factor.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,If Tyler had stashed\Nsome of his loan
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,under his mattress,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,instead of depositing it\Ninto a bank, then his bank --
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,it wouldn't have had the money\Nto lend out his deposit,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and the money multiplier\Nwould have been lower.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,And during a recession,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,both of these things\Ncan happen at the same time.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Banks may be reluctant to lend,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and they'll maybe\Nput more cash in reserve,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,plus people tend to hold more cash,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and not deposit their money\Nin banks during a recession.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Both of these factors\Ncause the money multiplier to fall.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,So the Federal Reserve\Nmay have to push harder
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,to increase the money supply
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,during a recession\Nthan during a boom.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,We're going to dive further
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,into how the Fed\Ncontrols the money supply,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,and how that's changed\Nsince the Great Recession
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,in our next video.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,[Narrator] You're on your way\Nto mastering economics.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Make sure this video sticks\Nby taking a few practice questions.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Or, if you're ready\Nfor more macroeconomics,
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,click for the next video.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Still here?
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,Check out Marginal Revolution\NUniversity's other popular videos.
Dialogue: 0,9:59:59.99,9:59:59.99,Default,,0000,0000,0000,,♪ [music] ♪