Lecture_notes11

Lecture_notes11 - To review: History of bank panics Banks...

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1 To review: History of bank panics • Banks began failing in Oct. 1930 (one year after crash) • Farmers defaulted on loans. Over 600 bank failures in Nov. and Dec. of 1930. • Fed did nothing! No bailout package. 1
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2 Money multiplier: Definitions DEFINITIONS: Money supply = stock of money held by public (M) = currency (C) + deposits (D) Monetary base = high-powered money (H) = currency (C) + reserves (R). Note: These are the liabilities of Central Bank. - M/H = (C+D)/(C+R) Divide numerator and denominator of RHS by C and R & multiply by D - M = H (D/R)(1+D/C) / (D/R+D/C) (D/R)(1+D/C) / (D/R+D/C) = Money multiplier
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3 Working with the money multiplier • Money multiplier = (D/R)(1+D/C) / (D/R+D/C) • Multiplier is number of dollars of money supply that can be created for every dollar of monetary base • Multiplier is greater than one if D/R >1 (fractional reserves)… that is, if some deposits are loaned out • And if D/C is > 0 … that is, consumers deposit some money in banks • Show that multiplier = 1 if D/R =1. If D/C =0.
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Bank panics and money multiplier Source: Friedman and Schwartz, 1971 • What is the money multiplier at the time of stock market crash? = 6.5 • What is the multiplier by final banking crisis? = 4.2
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This note was uploaded on 04/13/2009 for the course ECON 183 taught by Professor Boustan during the Winter '09 term at UCLA.

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Lecture_notes11 - To review: History of bank panics Banks...

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