Chapter 14 Determinants of the Money Supply

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Chapter 14 Determinants of the Money Supply Powered By Docstoc
					          Chapter 14
The Money Supply Process: Part 2




          Kazu Matsuda
            IBEC 352
         Money & Banking
            The Money Supply Model
Review: Ch.13 Simple Multiple Deposit Creation Model



Assumptions:



Ch.14
              Deriving the Money Multiplier
•   Assume that:
•   Desired level of currency C
•   Desired level of excess reserves ER
•   Grow proportionally with checkable deposits D.
        Intuition Behind the Money Multiplier
Numerical Example:
• r = required reserve ratio = 0.10
• C = currency in circulation = $400 billion
• D = checkable deposits = $800 billion
• ER = excess reserves = $0.8 billion
• M = money supply (M1) = C + D = $1,200 billion
    Factors that Determine the Money Multiplier
• Changes in the required reserve ratio r
   – The money multiplier and the money supply are   ?
     related to r
   – International r




• Changes in the currency ratio c
   – The money multiplier and the money supply are   ?
     related to c
    Factors that Determine the Money Multiplier
• Changes in the excess reserves ratio e
   – The money multiplier and the money supply are   ?
     related to the excess reserves ratio e



• market interest rate



• expected deposit outflows



• Expected writedowns
   Additional Factors That Determine the Money
                      Supply
• Open market operations are controlled by the Fed.
• The Fed cannot determine the amount of borrowing by banks
  from the Fed.
• Split the monetary base into two components:
[A] Changes in the Non-borrowed Monetary Base
• An open market purchase that ? the MBn          ?    the
   amount of monetary base. So the money supply will
   ?.
• An open market sale that     ?    the MBn    ?        the
   amount of monetary base. So the money supply will ?    .



[B] Changes in Discount Loans DL from the Fed
• An increase in BR provides additional reserves and higher
   MB. So the money supply will     ?     .
• A decrease in BR causes reserves to decline and lower MB.
   So the money supply will    ?     .
Application: Explaining Movements in the
       Money Supply, 1980 – 2005
• Over long periods, the primary determinant of movements in
  the money supply is the           ?             , which is
  controlled by the Federal Reserve open market operations.

• For shorter time periods, the link between the growth rates of
  the non-borrowed monetary base and the money supply is
  not always close, primarily because the money multiplier m
  experiences substantial short-run swings that have a major
  impact on the growth rate of the money supply.
                             (% )


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                                                   Plot of Federal Funds Rate




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                                         Plot of Federal Funds Rate




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posted:8/22/2011
language:English
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