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econ3 9-3

# econ3 9-3 - Ch 9 Money multiplier o o o o Money supply =...

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2-15-08 Ch. 9 - Money multiplier o Money supply = currency (money) + deposit(institute) o Monetary base = currency + desired reserves o Monetary base * money multiplier = money supply o Desired reserved ratio = (desired reserves) / (deposit) We call it “b” o Currency drain ration = (currency) / (deposit) We call it “a” b = (desired reserves) / (deposits) (deposits) * (b) = desired reserves a = (currency) / (deposits) a * deposits = currency o money supply = currency + deposits = (a) (deposit) + deposit o Money supply = (1+a)*deposit o Monetary base = currency + desired reserves = (a) (deposit) + (b) (deposit) o Monetary base = (a+b) *deposit o Monetary base x money multiplier = money supplier [(a+b) x deposit] x money multiplier = [(1 + a) x deposit] Money multiplier = [ (1 + a) / (a + b) ] ex.

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b = 0.1 a = .5 money multiplier = (1 + .5) / (.5 + .1) = 2.5 monetary base = \$2000 money supply = 2.5 x \$2000 = \$ 5000 - More we deposit greater money supply Ex. b = .1 a = 0 (no currency drain) more multiplier = (1 + 0) / (0 + .1) = 10 (that’s additional dollar) - Great depression experienced a lot of currency drained
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econ3 9-3 - Ch 9 Money multiplier o o o o Money supply =...

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