If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

## AP®︎/College Macroeconomics

### Course: AP®︎/College Macroeconomics>Unit 4

Lesson 4: Banking and the expansion of the money supply

# Bank balance sheet free response question

In this video, Sal walks through how to solve question 2 of the 2016 AP Macroeconomics exam. Topics include analyzing reserve requirements, determining the availability of funds that a bank can loan, and money creation through the fractional reserve banking system.

## Want to join the conversation?

• Can the answer to the last question also be because of leakages in the economy?
• Yes, but I would recommend being more specific about what you mean by leakages (like saying people hold excess cash, etc)
• My collegiate textbook simply says:
Change in money supply = Change in reserves * Money multiplier (1/0.1)

It does not subtract the initial infusion.

With a quick internet search, the one I typed seems to be the standard equation, although my book specifically says "change in.." and includes the delta symbol mathematically. The other two I found do not say "change in."

This seems like an important macro rule for exams. Is Sal overthinking the wording of that question (as I am also wont to do)?

Y'all rule. Thank you so very much.
(1 vote)
• No, that is exactly how the question is worded, and this kind of thing has been tested before! The key difference here is that your textbook is using the change in reserves and this question is based on a change in cash that already exists in the banking system. It seems like these are the same, but they really are distinct. The key is: is this change in the money supply a result in new money that was created (like when the Fed puts money in bank reserves), or is a change due to existing money being deposited.