What Is Money?

Money and the money multiplier

Money = the stock of assets you own and can spend now. It does three jobs: medium of exchange, store of value, unit of account.

• Fiat money (dollars) has no intrinsic value; commodity money (gold) does.
• Aggregates by liquidity: M0 (currency + reserves, the monetary base) ⊂ M1 (+ checking) ⊂ M2 (+ savings).
• Banks lend out deposits, so the base multiplies into a larger money supply:

\[M = B \cdot \frac{1+c}{rr+c}\]

where \(B\) = monetary base, \(rr\) = reserve ratio, \(c\) = currency-to-deposit ratio. The fraction is the money multiplier.

Try it. An open-market purchase raises the base \(B\). A lower reserve ratio raises the multiplier. Both expand the money supply.

#| standalone: true
#| viewerHeight: 520

library(shiny)
ui <- fluidPage(
  tags$head(tags$style(HTML("body{font-family:'Inter',system-ui,sans-serif;}
    .sb{background:#f0f4f8;border-radius:6px;padding:12px 14px;margin-top:10px;font-size:14px;line-height:1.85;} .sb b{color:#1f3b73;}"))),
  sidebarLayout(
    sidebarPanel(width=4,
      sliderInput("B","Monetary base  B (open-market ops):",min=100,max=2000,value=500,step=50),
      sliderInput("rr","Reserve ratio  rr:",min=0.05,max=1,value=0.1,step=0.05),
      sliderInput("c","Currency/deposit ratio  c:",min=0,max=0.5,value=0.2,step=0.05),
      uiOutput("sb")),
    mainPanel(width=8, plotOutput("plot",height="440px"))))
server <- function(input,output,session){
  mult <- function(rr,c) (1+c)/(rr+c)
  output$plot <- renderPlot({
    rg <- seq(0.05,1,length.out=200); Mg <- input$B*mult(rg,input$c)
    par(mar=c(4.2,4.8,1,1))
    plot(rg,Mg,type="l",col="#1f3b73",lwd=3,xlab="Reserve ratio  rr",ylab="Money supply  M",
         las=1,bty="l",cex.lab=1.1)
    points(input$rr,input$B*mult(input$rr,input$c),pch=19,col="#1c6b4a",cex=1.7)
  })
  output$sb <- renderUI({ m<-mult(input$rr,input$c)
    HTML(sprintf("<div class='sb'>Money multiplier = <b>%.2f</b><br>Money supply <b>M = %.0f</b><br>(base %.0f &times; %.2f)</div>",
      m,input$B*m,input$B,m)) })
}
shinyApp(ui,server)

What to notice

• A credit-card limit, a check in transit, and an unused credit line are not money — only owned, spendable balances count.
• Lower reserve ratio → bigger multiplier → more money from the same base.
• The Fed buys bonds to raise B (expand), sells to shrink it.