How do automatic stabilizers work in an expanding economy? What is the purpose of financial institutions? How is money created given a reserve ratio? How does bank create money? What are required reserve and excess reserve?

Automatic stabilizers balances economic fluctuations without any government intervention. During an expansion, the automatic stabilizers offsets the economic fluctuations by decreasing the government spendings and increasing taxes simultaneously to cope up with an expanding economy. Doing so will bring down the economy to its original place.

The purpose of financial institutions is to safeguard the wealth of the people. It provides access to financial markets whereby people can buy or sell government securities. Most important of them all is to maintain liquidity and adequate interest rate in order to sustain the economy.

Given a reserve ratio, a portion of money deposited to the bank is held as reserves. The money multiplier is the maximum amount of money that can be created by the Central bank. Now, multiplying the amount of deposits to the multipler will gives us the total amount of money created in the economy.

A portion of the money that has been deposited in the bank is kept as reserves. The remaining money is loaned out to the customers by the commercial banks. The interest incurred on the loan will give bigger returns and thus, money is created.