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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
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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4 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
5 How to distinguish between a fall in money supply and a decline in money demand?

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

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