The objective of this note is to provide an overview of monetary policy tools and the primary policy objectives. The mechanics behind the money multiplier are explained, and an algebraic derivation is provided. The note also provides examples of how parameters associated with the money multiplier influence its magnitude, including the propensity of the public to hold currency relative to demand deposits and the propensity of banks to hold reserves relative to demand deposits. The companion exercise allows students to walk through the mechanics of expansionary monetary policy.
