INTERMEDIATE MACROECONOMICS Instructor Filip Vesely by yaoyufang

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									 INTERMEDIATE
MACROECONOMICS


    Instructor:
   Filip Vesely
                  L19
 INTERMEDIATE
MACROECONOMICS


    Instructor:
   Filip Vesely
                  L20
     The Supply of Money
    MANY PLAYERS
1. Central bank (for example the Fed)
2. Banking System (Commercial Banks)
3. Public (Depositors and Borrowers)
            The Central Bank Balance Sheet
H (Monetary Base, CB money) = CU + R
          = (Fed notes) + (bank deposits) + (Treasury currency) – (coin)
Banking System Balance Sheet
  (Commercial Banks in %)
         Public Balance Sheet


MONEY                   LOANS
 CASH (Notes + Coins)
 DEPOSITS


Other Assets
                 The Supply of Money
Money Supply definition 1 (M1):
      The sum of legal tender notes and coins held by the public plus
      customers' demand deposits placed with banks.
Money Supply definition 2 (M2):
      M1 plus customers' savings and small time deposits.
Money Supply definition 3 (M3):
      M2 plus other customers' deposits.
…
Money = CASH + DEPOSITS

CENTRAL BANKS use three tools to change it
   Open Market Operation
   Discount Loans
   Required Reserve Ratio
       (1) OPEN MARKET OPERATION
                             Note: Monetary Base (H) = CU + R

1a. Open Market Purchase from Bank
              Banking System                                  Central Bank
Assets                 Liabilities                 Assets                  Liabilities
Securities – $100                                Securities + $100      Reserves + $100
Reserves + $100



1b. Open Market Purchase from Public (buyer deposits its check)
                    Public                                    Central Bank
Assets                    Liabilities              Assets                    Liabilities
Securities – $100                               Securities + $100         Reserves + $100
Deposits + $100


           Banking System
Assets                Liabilities
Reserves +100         Checkable Deposits +100




                                                Result: H ↑ $100
     1c. Open Market Purchase from Public (buyer
                              cashes the check)

           Public                                        Central Bank
Assets              Liabilities              Assets                Liabilities
Securities – $100                           Securities + $100      Currency + $100
Currency + $100




Result: H ↑ $100                  (Effect on H certain, on R and CU uncertain)
             (2) DISCOUNT LOANS
                 Note: Monetary Base (H) = CU + R


Banking System                                   Central Bank
Assets           Liabilities       Assets             Liabilities
Reserves         Discount          Discount           Reserves
 + $100          loan + $100       loan + $100        + $100



Result: H ↑ $100

Conclusion: Fed has better ability to control H

Next step:       H determines Ms (Money Creations)
(3) REQUIRED RESERVE RATIO (θ =10%)
                                First National Bank
      Assets                             Liabilities
       Reserves         + $100            Deposits
           Securities       - $100
                    Loans


                                         Bank A
      Assets                             Liabilities
      Reserves                           Deposits
                    Loans


                                         Bank B
      Assets                             Liabilities
      Reserves                           Deposits
                    Loans
                      First National Bank
Assets                        Liabilities
Reserves     + $100           Deposits
                                   XXXX
Securities   - $100
Loans                             + $100


                           Bank A
Assets                      Liabilities
Reserves        + $100      Deposits        +$100
Loans


                            Bank B
Assets                       Liabilities
Reserves                     Deposits
Loans
                    First National Bank
Assets                      Liabilities
Reserves     + $100
             XXXX           Deposits
                                 XXXX
Securities   - $100
Loans        + $100              + $100


                          Bank A
Assets                      Liabilities
Reserves         XXXX + $ 10Deposits
             + $100                         +$100
Loans                              + $ 90


                           Bank B
Assets                      Liabilities
Reserves        + $ 90      Deposits           +$ 90
Loans
                    First National Bank
Assets                      Liabilities
Reserves     + $100
             XXXX           Deposits
                                 XXXX
Securities   - $100
Loans        + $100              + $100


                          Bank A
Assets                      Liabilities
Reserves     + $100
             XXXXXXXX + $ 10Deposits        +$100
Loans                              + $ 90


                         Bank B
Assets                    Liabilities
Reserves     XXXX90 $ 9 Deposits
               +$ +                            +$ 90
Loans             + $ 81
Deposit Creation

								
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