Lecture 17-Money creation.pdf

# Lecture 17-Money creation.pdf - 30-Jan-18 MACROECONOMICS...

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30-Jan-18 1 MACROECONOMICS LECTURE 17 MONEY CREATION: ENDOGENOUS VS EXOGENOUS MONEY GROUP DISCUSSION A video that describes many debatable issues about money and debt: https:// Suppose that someone visits a bank branch in order to apply for a loan (e.g. consumer loan, student loan or mortgage). 1. What do you expect to be the first reaction of the bank officer? What is s/he going to ask the potential borrower? 2. Is the bank officer going to check the reserves of the bank? 3. If the bank officer decides to provide the loan, what factors will affect the level of the interest rate? 2 CONTENTS OF THE LECTURE 1. The exogenous money approach 2. The endogenous money approach 3. Summary: exogenous vs endogenous money 4. Endogenous money and IS-LM

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30-Jan-18 2 CONTENTS OF THE LECTURE 1. The exogenous money approach 2. The endogenous money approach 3. Summary: exogenous vs endogenous money 4. Endogenous money and IS-LM 1. THE EXOGENOUS MONEY APPROACH The exogenous money approach is the traditional way of understanding and formulating the money creation process. It can be found in most traditional textbooks of money and banking. This approach intends to explain how much money is created in the economy as a result of the decision of the central bank to increase the reserves of commercial banks (currency+central bank reserves). 5 1. THE EXOGENOUS MONEY APPROACH In the exogenous money approach the reserve ratio plays an important role. The reserve ratio is the ratio of reserves to deposits. For example, when the reserves of a bank are £10 and the deposits are £100, the reserve ratio is 10/100=10%.
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