A 6-step visual walkthrough of the Financial Sector — money creation, the money multiplier, the money market, and monetary policy, built right into the page.
With a 10% required reserve ratio, a bank receiving a $1,000 deposit must hold $100 in reserves but can lend out the remaining $900 in excess reserves — the first step in money creation.
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The Money Creation Cycle
The loan becomes someone else's deposit, which becomes a new bank's excess reserves to lend again. This cycle repeats, with each round slightly smaller, expanding the total money supply far beyond the original deposit.
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The Money Multiplier
Money multiplier = 1 ÷ required reserve ratio. A 10% reserve ratio gives a multiplier of 10 — so a $1,000 initial deposit can theoretically expand the money supply by up to $10,000.
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The Money Market
Money supply is vertical — set directly by the Fed, independent of the interest rate. Money demand slopes downward. Their intersection sets the nominal interest rate.
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Expansionary Monetary Policy
The Fed buys bonds (open market purchase), shifting money supply right (MS1 → MS2). This lowers the interest rate, boosting investment and consumption — used to fight a recessionary gap.
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The Loanable Funds Market
Unlike the money market, both curves can shift here. Savers supply funds, borrowers demand them, and their intersection sets the real interest rate — government deficits shift demand right, raising rates and risking crowding out.
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How to use the visual review
Spend 30 seconds per step before clicking next. Look at the diagram, then ask yourself: "Could I sketch this from memory and label every part?"
Use the dots below the diagram to jump straight to any step, or the arrow keys to move forward and back.
This is great for review the night before the exam — fast, visual, and covers every core diagram you need to remember from Unit 4.