Macroeconomics › Section N · Money and banking › Topic N.4
How banks create money
Most of the money you use was not printed by anyone: it came into being when a bank made a loan. The textbook money multiplier shows how lending ripples through the banking system, and the modern view explains what really limits it today.
In this topic
- Lending creates deposits
- The textbook model: fractional reserves
- Worked example: following the rounds
- The money multiplier formula
- Worked example: checking the multiplier
- Leaks that shrink the multiplier
- Why the simple story is dated
- What really limits bank lending
- Common mistakes to avoid
- Key takeaways
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