Determinants of the Money Supply chapter 17 Determinants of the Money Supply
Money Multiplier M = m MB Deriving Money Multiplier R = RR + ER RR = rD D R = (rD D) + ER Adding C to both sides R + C = MB = (rD D) + ER + C
1 D = MB rD + {ER/D} + {C/D} M = D + ({C/D} D ) = (1 + {C/D}) D 1 + {C/D} M = MB m = m < 1/rD because no multiple expansion for currency and because as D ER
(1) r is negatively related with m (2)c is also negatively related with m (3) e is negatively related with m market interest rates affect e expected deposit outflows affect e Full Model M = m (MBn + DL)
Excess Reserves Ratio Determinants of {ER/D} 1. i , relative RETe on ER (opportunity cost ), {ER/D} 2. Expected deposit outflows, ER insurance worth more, {ER/D}
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Discount Loans and Interest Spread Determinants of DL 1. i , i – id , DL 2. id , i – id , DL
Factors Determining Money Supply
Money Supply
Determinants of the Money Supply
Deposits at Failed Banks: 1929–33
{ER/D}, {C/D}: 1929–33
Money Supply and Monetary Base: 1929–33
M2 Money Multiplier M2 = D + ({C/D}D) + ({T/D}D) + ({MMF/D}D) = (1+{C/D}+{T/D}+{MMF/D}) D 1+{C/D}+{T/D}+{MMF/D} M2 = MB rD + {ER/D} + {C/D} m2 =
Factors Determining M2
Example If we know required reserves rate =0.10, C=280 billion, D=800 billion, ER=40 billion, please calculate (1)c, e , m, RR, R and MB; (2) If central bank reduce the required reserve rate of the checkable deposit to 0.08, monetary base remain constantly, please calculate m, M, D, C, RR and ER.
Answer: (1) c=280/800=0.35 e=40/800=0.05 m=1.35/0.5=2.7 RR=r*D=0.1*800=80 b R=RR+ER=120b MB=C+R=280+120=400b
(2)m=1.35/0.48=2.8125 M=400/2.8125=1125b M=C+D=c*D+D=(1+c)*D=1.35D D=1125/1.35=833.33b C=c*D=0.35*833.33=291.67b RR=0.08*833.33=66.67b ER=120-66.67=53.33b