[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.12,0:00:03.79,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:16.07,0:00:18.70,Default,,0000,0000,0000,,[Alex] Now that we know\Nhow money is defined,
Dialogue: 0,0:00:18.70,0:00:22.88,Default,,0000,0000,0000,,we'll learn how banks\Ncan affect the supply of money
Dialogue: 0,0:00:22.88,0:00:25.40,Default,,0000,0000,0000,,through fractional reserve banking.
Dialogue: 0,0:00:25.88,0:00:28.47,Default,,0000,0000,0000,,Let's imagine\Nthat you graduate from college,
Dialogue: 0,0:00:28.47,0:00:31.98,Default,,0000,0000,0000,,and your grandma gives you\N$1,000 in cash --
Dialogue: 0,0:00:31.98,0:00:37.14,Default,,0000,0000,0000,,that she's been saving\Nunder her mattress since the 1970s --
Dialogue: 0,0:00:37.14,0:00:40.35,Default,,0000,0000,0000,,and you deposit this cash\Nin your checking account.
Dialogue: 0,0:00:40.35,0:00:42.22,Default,,0000,0000,0000,,What does the bank do\Nwith your money?
Dialogue: 0,0:00:42.61,0:00:45.45,Default,,0000,0000,0000,,Does it sit in a vault\Nwith your name on it?
Dialogue: 0,0:00:45.80,0:00:46.82,Default,,0000,0000,0000,,No.
Dialogue: 0,0:00:47.25,0:00:52.29,Default,,0000,0000,0000,,Banks lend most of your money\Nto people who want to borrow.
Dialogue: 0,0:00:52.76,0:00:57.63,Default,,0000,0000,0000,,Banks keep in reserve\Nonly a fraction of your money --
Dialogue: 0,0:00:57.63,0:01:00.40,Default,,0000,0000,0000,,money they keep in cash\Nfor the ATM,
Dialogue: 0,0:01:00.40,0:01:02.68,Default,,0000,0000,0000,,or to meet withdrawal demands.
Dialogue: 0,0:01:02.68,0:01:07.40,Default,,0000,0000,0000,,This is why this system is known\Nas "fractional reserve banking."
Dialogue: 0,0:01:07.73,0:01:11.13,Default,,0000,0000,0000,,So what fraction of your deposit\Ndo banks keep in reserve?
Dialogue: 0,0:01:11.98,0:01:14.42,Default,,0000,0000,0000,,Well, large banks\Nin the United States
Dialogue: 0,0:01:14.42,0:01:20.12,Default,,0000,0000,0000,,must keep in reserve at least $1\Nfor every $10 in deposits,
Dialogue: 0,0:01:20.76,0:01:23.78,Default,,0000,0000,0000,,or we say the large banks\Nare required
Dialogue: 0,0:01:23.78,0:01:27.100,Default,,0000,0000,0000,,to have a reserve ratio\Nof at least 10%.
Dialogue: 0,0:01:27.100,0:01:31.58,Default,,0000,0000,0000,,But banks often have\Nhigher reserve ratios
Dialogue: 0,0:01:31.58,0:01:34.94,Default,,0000,0000,0000,,depending upon how liquid\Nthat they want to be.
Dialogue: 0,0:01:34.94,0:01:36.16,Default,,0000,0000,0000,,If a bank is worried
Dialogue: 0,0:01:36.16,0:01:39.28,Default,,0000,0000,0000,,that its customers might withdraw\Nmost of their money,
Dialogue: 0,0:01:39.28,0:01:42.49,Default,,0000,0000,0000,,or if bank loans are just\Nnot that profitable,
Dialogue: 0,0:01:42.99,0:01:45.65,Default,,0000,0000,0000,,banks will hold more reserves.
Dialogue: 0,0:01:45.87,0:01:49.18,Default,,0000,0000,0000,,So the reserve ratio\Ncan be greater than 10%
Dialogue: 0,0:01:49.76,0:01:52.21,Default,,0000,0000,0000,,and it can change over time.
Dialogue: 0,0:01:52.21,0:01:54.50,Default,,0000,0000,0000,,Because of\Nfractional reserve banking
Dialogue: 0,0:01:54.50,0:01:58.19,Default,,0000,0000,0000,,the banking system has a big effect\Non the supply of money.
Dialogue: 0,0:01:58.19,0:01:59.50,Default,,0000,0000,0000,,Let's see how.
Dialogue: 0,0:01:59.50,0:02:04.33,Default,,0000,0000,0000,,Suppose that your bank keeps 10%\Nof your $1,000 deposit,
Dialogue: 0,0:02:04.33,0:02:06.88,Default,,0000,0000,0000,,or $100 as reserve.
Dialogue: 0,0:02:07.34,0:02:12.83,Default,,0000,0000,0000,,And suppose it lends out\N90%, or $900,
Dialogue: 0,0:02:12.83,0:02:15.94,Default,,0000,0000,0000,,say to Tyler, who's interested\Nin starting a business.
Dialogue: 0,0:02:16.56,0:02:21.99,Default,,0000,0000,0000,,That $900 loan is credited\Nto Tyler's checking account.
Dialogue: 0,0:02:22.46,0:02:27.46,Default,,0000,0000,0000,,So now there's $1,900\Nin new deposits,
Dialogue: 0,0:02:27.46,0:02:31.86,Default,,0000,0000,0000,,and since checkable deposits\Nare part of the money supply,
Dialogue: 0,0:02:31.86,0:02:34.72,Default,,0000,0000,0000,,the money supply has increased.
Dialogue: 0,0:02:35.29,0:02:36.97,Default,,0000,0000,0000,,And it doesn't stop there.
Dialogue: 0,0:02:36.97,0:02:41.79,Default,,0000,0000,0000,,Suppose that the bank holds 10%\Nof Tyler's deposit in reserve,
Dialogue: 0,0:02:41.79,0:02:46.99,Default,,0000,0000,0000,,and it lends out 90%, or $810,
Dialogue: 0,0:02:46.99,0:02:48.22,Default,,0000,0000,0000,,say to Janet.
Dialogue: 0,0:02:49.08,0:02:54.00,Default,,0000,0000,0000,,Now deposits have increased\Nby $2,710.
Dialogue: 0,0:02:54.00,0:02:57.35,Default,,0000,0000,0000,,And suppose that 10%\Nof Janet's money is held in reserve,
Dialogue: 0,0:02:57.35,0:02:59.05,Default,,0000,0000,0000,,and the rest is lent out.
Dialogue: 0,0:02:59.33,0:03:01.48,Default,,0000,0000,0000,,And so this process continues.
Dialogue: 0,0:03:01.95,0:03:04.61,Default,,0000,0000,0000,,And as the banks make more loans,
Dialogue: 0,0:03:04.61,0:03:06.78,Default,,0000,0000,0000,,that increases\Nthe number of deposits,
Dialogue: 0,0:03:06.78,0:03:08.28,Default,,0000,0000,0000,,which increases\Nthe number of loans,
Dialogue: 0,0:03:08.28,0:03:10.25,Default,,0000,0000,0000,,which increases\Nthe number of deposits.
Dialogue: 0,0:03:10.43,0:03:13.97,Default,,0000,0000,0000,,So how much money\Ndo we ultimately end up with?
Dialogue: 0,0:03:14.40,0:03:15.95,Default,,0000,0000,0000,,You can figure that out
Dialogue: 0,0:03:15.95,0:03:19.12,Default,,0000,0000,0000,,using what's called\Nthe "money multiplier."
Dialogue: 0,0:03:19.43,0:03:21.07,Default,,0000,0000,0000,,The money multiplier tells us
Dialogue: 0,0:03:21.07,0:03:24.62,Default,,0000,0000,0000,,how many dollar's worth\Nof deposits are created
Dialogue: 0,0:03:24.62,0:03:27.64,Default,,0000,0000,0000,,with each additional dollar\Nof reserves.
Dialogue: 0,0:03:28.15,0:03:30.27,Default,,0000,0000,0000,,And the money multiplier is simple.
Dialogue: 0,0:03:30.67,0:03:34.82,Default,,0000,0000,0000,,It's just 1 divided\Nby the reserve ratio.
Dialogue: 0,0:03:34.82,0:03:37.00,Default,,0000,0000,0000,,So if the reserve ratio is 10%,
Dialogue: 0,0:03:37.41,0:03:42.01,Default,,0000,0000,0000,,the money multiplier is\N1 divided by 0.1, or 10.
Dialogue: 0,0:03:42.30,0:03:47.62,Default,,0000,0000,0000,,And what that means is that\N$1 in new reserves
Dialogue: 0,0:03:47.62,0:03:52.02,Default,,0000,0000,0000,,will ultimately lead,\Nthrough the multiplier process,
Dialogue: 0,0:03:52.02,0:03:55.72,Default,,0000,0000,0000,,to $10 in additional money
Dialogue: 0,0:03:55.72,0:03:59.02,Default,,0000,0000,0000,,as measured by, say, M1 or M2.
Dialogue: 0,0:03:59.02,0:04:02.01,Default,,0000,0000,0000,,Now let's clarify\Nour previous example,
Dialogue: 0,0:04:02.01,0:04:06.26,Default,,0000,0000,0000,,and why it was key\Nthat Grandma was pulling cash
Dialogue: 0,0:04:06.26,0:04:07.91,Default,,0000,0000,0000,,from under her mattress.
Dialogue: 0,0:04:07.91,0:04:11.96,Default,,0000,0000,0000,,If Grandma had instead\Ngiven you a check for $1,000,
Dialogue: 0,0:04:11.96,0:04:15.68,Default,,0000,0000,0000,,she'd simply be transferring money\Nfrom her account to yours --
Dialogue: 0,0:04:15.68,0:04:19.57,Default,,0000,0000,0000,,which would not be creating\Nnew reserves,
Dialogue: 0,0:04:19.57,0:04:22.37,Default,,0000,0000,0000,,and so we wouldn't see\Nthis multiplier effect.
Dialogue: 0,0:04:22.37,0:04:26.60,Default,,0000,0000,0000,,And, actually, the key player here\Nisn't Grandma --
Dialogue: 0,0:04:26.60,0:04:28.21,Default,,0000,0000,0000,,it's Uncle Sam.
Dialogue: 0,0:04:28.59,0:04:32.79,Default,,0000,0000,0000,,The Federal Reserve can,\Nwith the click of a computer button,
Dialogue: 0,0:04:32.79,0:04:34.76,Default,,0000,0000,0000,,create new money,
Dialogue: 0,0:04:34.76,0:04:39.52,Default,,0000,0000,0000,,new money which it can use\Nto buy financial assets,
Dialogue: 0,0:04:39.52,0:04:44.60,Default,,0000,0000,0000,,thus injecting new reserves\Ninto the banking system.
Dialogue: 0,0:04:44.85,0:04:46.03,Default,,0000,0000,0000,,But the Feds' control
Dialogue: 0,0:04:46.03,0:04:48.84,Default,,0000,0000,0000,,over the money-supply process\Nis indirect.
Dialogue: 0,0:04:49.47,0:04:52.53,Default,,0000,0000,0000,,If banks hold the minimum amount\Nof required reserves --
Dialogue: 0,0:04:52.53,0:04:54.100,Default,,0000,0000,0000,,10% as we assumed earlier --
Dialogue: 0,0:04:54.100,0:04:57.90,Default,,0000,0000,0000,,then the money multiplier\Nwill be close to 10.
Dialogue: 0,0:04:57.90,0:05:02.01,Default,,0000,0000,0000,,And if this is the case,\Nthe Fed will have a lot of leverage
Dialogue: 0,0:05:02.01,0:05:07.22,Default,,0000,0000,0000,,to move M1 and M2\Nwith a small change in reserves.
Dialogue: 0,0:05:07.22,0:05:09.59,Default,,0000,0000,0000,,But in normal circumstances,
Dialogue: 0,0:05:09.59,0:05:12.54,Default,,0000,0000,0000,,the actual money multiplier\Nis closer to 3.
Dialogue: 0,0:05:13.18,0:05:14.25,Default,,0000,0000,0000,,How come?
Dialogue: 0,0:05:14.60,0:05:19.57,Default,,0000,0000,0000,,Well, remember, banks can't hold\Nless than 10% in reserve.
Dialogue: 0,0:05:19.94,0:05:21.74,Default,,0000,0000,0000,,They can always hold more.
Dialogue: 0,0:05:22.10,0:05:26.87,Default,,0000,0000,0000,,And the more banks hold in reserve,\Nthe lower the money multiplier.
Dialogue: 0,0:05:26.87,0:05:28.61,Default,,0000,0000,0000,,So it's important to understand
Dialogue: 0,0:05:28.61,0:05:32.27,Default,,0000,0000,0000,,that the money multiplier\Nisn't a fixed number,
Dialogue: 0,0:05:32.27,0:05:36.100,Default,,0000,0000,0000,,and the multiplier process\Nisn't a mechanical relation.
Dialogue: 0,0:05:36.100,0:05:38.55,Default,,0000,0000,0000,,Here's another factor.
Dialogue: 0,0:05:39.07,0:05:41.90,Default,,0000,0000,0000,,If Tyler had stashed\Nsome of his loan
Dialogue: 0,0:05:41.90,0:05:43.75,Default,,0000,0000,0000,,under his mattress
Dialogue: 0,0:05:43.75,0:05:46.87,Default,,0000,0000,0000,,instead of depositing it\Ninto a bank,
Dialogue: 0,0:05:46.87,0:05:48.29,Default,,0000,0000,0000,,then his bank --
Dialogue: 0,0:05:48.29,0:05:51.57,Default,,0000,0000,0000,,it wouldn't have had the money\Nto lend out his deposit,
Dialogue: 0,0:05:51.57,0:05:53.99,Default,,0000,0000,0000,,and the money multiplier\Nwould have been lower.
Dialogue: 0,0:05:54.36,0:05:55.81,Default,,0000,0000,0000,,And during a recession,
Dialogue: 0,0:05:55.81,0:05:58.52,Default,,0000,0000,0000,,both of these things\Ncan happen at the same time.
Dialogue: 0,0:05:58.52,0:06:01.02,Default,,0000,0000,0000,,Banks may be reluctant to lend,
Dialogue: 0,0:06:01.02,0:06:04.04,Default,,0000,0000,0000,,and they'll maybe\Nput more cash in reserve,
Dialogue: 0,0:06:04.04,0:06:06.40,Default,,0000,0000,0000,,plus people tend to hold more cash,
Dialogue: 0,0:06:06.40,0:06:10.21,Default,,0000,0000,0000,,and not deposit their money\Nin banks during a recession.
Dialogue: 0,0:06:10.21,0:06:14.24,Default,,0000,0000,0000,,Both of these factors\Ncause the money multiplier to fall.
Dialogue: 0,0:06:14.24,0:06:18.67,Default,,0000,0000,0000,,So the Federal Reserve\Nmay have to push harder
Dialogue: 0,0:06:18.67,0:06:22.08,Default,,0000,0000,0000,,to increase the money supply\Nduring a recession
Dialogue: 0,0:06:22.08,0:06:23.78,Default,,0000,0000,0000,,than during a boom.
Dialogue: 0,0:06:23.96,0:06:25.35,Default,,0000,0000,0000,,We're going to dive further
Dialogue: 0,0:06:25.35,0:06:27.60,Default,,0000,0000,0000,,into how the Fed\Ncontrols the money supply,
Dialogue: 0,0:06:27.60,0:06:30.31,Default,,0000,0000,0000,,and how that's changed\Nsince the Great Recession
Dialogue: 0,0:06:30.31,0:06:31.84,Default,,0000,0000,0000,,in our next video.
Dialogue: 0,0:06:33.12,0:06:35.54,Default,,0000,0000,0000,,[Narrator] You're on your way\Nto mastering economics.
Dialogue: 0,0:06:35.54,0:06:38.98,Default,,0000,0000,0000,,Make sure this video sticks\Nby taking a few practice questions.
Dialogue: 0,0:06:38.98,0:06:41.12,Default,,0000,0000,0000,,Or, if you're ready\Nfor more macroeconomics,
Dialogue: 0,0:06:41.12,0:06:42.48,Default,,0000,0000,0000,,click for the next video.
Dialogue: 0,0:06:44.61,0:06:45.45,Default,,0000,0000,0000,,Still here?
Dialogue: 0,0:06:45.45,0:06:48.75,Default,,0000,0000,0000,,Check out Marginal Revolution\NUniversity's other popular videos.
Dialogue: 0,0:06:48.75,0:06:51.23,Default,,0000,0000,0000,,♪ [music] ♪