Editing Macroeconomics (section)

=== Money Supply & Money Multiplier: Equation & Explanations ===
Two common ways of determining the total money supply in an economy are M1 and M2. M2 consists of M1 plus a few other things. M1 is money that is liquid. Liquid refers to a financial asset being able to easily be converted into cash quickly and without losing a significant amount of value. This obviously includes cash but also things like coins, checking account deposits, etc. M2, however, includes time deposits, saving accounts, and money market mutual funds, which are not as liquid, in its measurement. It is important to know about the money supply as it affects interest rates and can also play a central role in monetary policy.<ref>{{Cite web |title=Deposit Multiplier vs. Money Multiplier: What's the Difference? |url=https://www.investopedia.com/ask/answers/062615/what-difference-between-deposit-multiplier-and-money-multiplier.asp?utm_source=chatgpt.com#toc-deposit-multiplier |access-date=2025-04-30 |website=Investopedia |language=en}}</ref>

The Money Multiplier equation shows how the bank can expand the money supply through taking in deposits and lending money.

The '''Money Supply Reserve Multiplier equation''' is:

'''Money Multiplier''' = 1 / '''Reserve Requirement Ratio'''<ref>{{Cite web |title=What Is the Multiplier Effect? Formula and Example |url=https://www.investopedia.com/terms/m/multipliereffect.asp#toc-money-supply-multiplier-effect |access-date=2025-04-29 |website=Investopedia |language=en}}</ref>

The reserve requirement in this equation represents a proportion of money that the bank is required to keep in case they need to deal with withdrawals from customers. That proportion of money is based on the deposits of money made at the bank. So, if the reserve requirement is .20(20%), then the money multiplier is 5. This means that a $5 deposit would lead to a $25 increase in the money supply. This is because of the cycle of the bank keeping part of the deposit(in our example, 20%) and lending out the rest every time. These new spendable bank deposits are counted in the money supply even though the amount of physical currency did not change. So, while the physical amount of currency would still be $5, the amount of spendable money would be $25.