12 monetary policy.docx - Non bank financial intermediates...

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Non bank financial intermediates: Building societies, credit unions, money market corporations, finance company ADI: banks+ building societies + credit unions M1 =Currency (notes and coins) held by private non-bank sector (households and firms) +bank current deposits from the private non-bank sector M3 =M1+all other ADI deposits +certificates of deposit issued by banks ADI: authorised deposit-taking institution Broad Money = M3+borrowings from the private sector by AFI’s AFI: all financial intermediates The creation of money D= 1 r B ∆ B The size of the original deposit, r: required rate of reserve Reserve-deposit ratio: Reserves Deposits =res 100% reserve banking: bank reserves= 100% bank deposits Fractional-reserve banking system: banks hold fewer reserves than deposits, reserve-deposit ratio<100% The process of expansion of loans and deposits will end when reserves equal % (reserve-deposit ratio) of bank deposits, because as long as reserves exceed % of deposits, the banks will find it profitable to lend out the extra reserves. Money Supply=M: Money supply=currency held by non-bank public+ deposits M=CU+D=kD+ D CU=k D (k= currency deposits ) M= ( k + 1 ) ( k + r ) MB The demand to hold the monetary base (as currency CU or reserves R), is to hold only a fraction less than 1 of the money supply
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