Tutorial_CHAP18

Tutorial_CHAP18 - CHAPTER 18 Money Supply and Money Demand...

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Chapter Eighteen 1 ® CHAPTER 18 Money Supply and Money Demand A PowerPoint Tutorial To Accompany MACROECONOMICS, 6th. ed. N. Gregory Mankiw By Mannig J. Simidian
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Chapter Eighteen 2 To understand the money supply, we must understand the interaction between currency and demand deposits and how the Fed policy influences these two components of the money supply.
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Chapter Eighteen 3 M = C + D Money Supply Currency Demand Deposits In this chapter, we’ll see that the money supply is determined not only by the Federal Reserve, but also by the behavior of households (which hold money) and banks (where money is held).
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Chapter Eighteen 4 The deposits that banks have received but have not lent out are called reserves. Consider the case where all deposits are held as reserves: banks accept deposits, place the money in reserve, and leave the money there until the depositor makes a withdrawal or writes a check against the balance. In a 100-percent-reserve banking system, all deposits are held in reserve; thus the banking system does not affect the supply of money. A Sample 100-Percent-Reserve Bank Balance Sheet Assets Liabilities Reserves $1,000 Deposits $1,000
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Chapter Eighteen 5 As long as the amount of new deposits approximately equals the amount of withdrawals, a bank need not keep all its deposits in reserves. Note: a reserve-deposit ratio is the fraction of deposits kept in reserve. Excess reserves are reserves above the reserve requirement. Fractional-reserve banking , a system under which banks keep only a fraction of their deposits in reserve. In a system of fractional-reserve banking, banks create money. A Sample Fractional-Reserve Bank Balance Sheet Assets Liabilities Reserves $200 Loans $800 Deposits $1,000 Let’s look at how money creation works…
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Chapter Eighteen 6 Firstbank Balance Sheet Secondbank Balance Sheet Thirdbank Balance Sheet Assets Liabilities Assets Liabilities Assets Liabilities Reserves $200 Deposits $1,000 Loans $800 Reserves $128 Deposits $640 Loans $512 Reserves $160 Deposits $800 Loans $640 Assume each bank maintains a reserve-deposit ratio (rr) of 20 percent and that the initial deposit is $1,000 . Mathematically, the amount of money the original $1000 deposit creates is:
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This note was uploaded on 04/29/2009 for the course ECO 3302 taught by Professor Avdjiev during the Spring '08 term at SMU.

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Tutorial_CHAP18 - CHAPTER 18 Money Supply and Money Demand...

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