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A Generalized Exposition of Money Creation in the Money and Banking Course

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Listed:
  • Eran Guse
  • David W. Brasfield

Abstract

Since the Great Recession, monetary policy conducted by the U.S. Federal Reserve and other central banks has changed. However, the discussion regarding money creation and the money multiplier has not been altered in undergraduate money and banking textbooks. We suggest a change to the presentation of money creation by first removing the use of T-accounts and replacing them with a visual representation known as the money production diagram. We then present a money production function that is much like a standard production function as described in principles courses. The money multiplier is replaced by the average product of the monetary base in this production function. We use this production function to explain changes to the money supply from exogenous shocks or changes to policy. JEL classification : A22, E51, E52

Suggested Citation

  • Eran Guse & David W. Brasfield, 2020. "A Generalized Exposition of Money Creation in the Money and Banking Course," The American Economist, Sage Publications, vol. 65(2), pages 244-263, October.
    • Handle: RePEc:sae:amerec:v:65:y:2020:i:2:p:244-263
    DOI: 10.1177/0569434519891974
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    References listed on IDEAS

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    More about this item

    Keywords

    money multiplier; monetary policy; money and banking; quantitative easing; interest on reserves;
    All these keywords.

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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