key principle

• A single bank can create money (through loans) by the amount of excess reserves
• Banking system as a while can create money by a multiple (deposition) money multiplier of the initial excess reserves.

Factors that weaken the effectiveness of deposit multiplier:

1. If banks fail to loan out all of its excess reserves.
2. If bank customers take their loans in cash rather than in their checking account deposits it creates a cash or currency drain.

MONEY MARKET

Inverse relationship between money, demand, and interest rates.

DM ; MD up    :  ir down

money demand shifter:

1. Change in price level
2. Change in income