Principles of Macroeconomics / Unit 12 MAC 1117 short lesson, about 20 seconds
Where the Money Supply Actually Changes
Captions available
The idea
The money supply does not change when the central bank buys the bond. It changes when the bank lends the resulting excess reserves, because lending creates deposits and deposits are money.
In practice
The purchase creates the capacity; the lending creates the money.
Where people slip
This is why expansion can stall. A bank that declines to lend leaves the capacity unused.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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