Economics 100B - 18 (3-15-07)

Economics 100B - 18 (3-15-07) - Economics 100B Professor...

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ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course ANNOUNCEMENTS I sent you all an e-mail last night letting you know that there were a large number of identical answers on problem set 4. You are supposed to be writing your answers in your own words; not in mine or in the GSI’s. If you have questions come to office hours, don’t just copy an answer. All of you who already have gotten your problem set 4 back will turn them back in. If your answer is one of the plagiarized answers, you will receive 0 credit. I take academic integrity seriously as does the university; if this happens again there will be further consequences. I know at the end of the lecture I go through take-away slides. This does not mean you can get up and leave. Please stay until I finish the lecture to avoid distracting your classmates. LECTURE Today we will be discussing monetary policy. We will skip talking about the structure of the Fed and worry more about the actual mechanics of the money supply. Specifically we will discuss money creation, the money multiplier, the money supply, and monetary policy tools. Money Creation How does money get created in an economy? Without saying, we need commercial banks but beyond that however: Required conditions for money creation: 1) Equivalence of cash and deposits. What we can spend as cash and what is in our checking account are exactly the same in terms of spending. 2) The redeposit of loan proceeds. When you get a loan, we assume that you will spend it and then that money will wind up back in the banking system. 3) Banks hold fractional cash reserves. When you make a deposit in the bank, the bank must hold a portion of that deposit in cash; it cannot lend the entire deposit. 4) The presence of willing borrowers. People have to be willing to borrow money at the going interest rate. 5)
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Economics 100B - 18 (3-15-07) - Economics 100B Professor...

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