This preview shows page 1. Sign up to view the full content.
Unformatted text preview: The total increase in new money (call this “ D ”) can be found by adding up all the successive changes in new money, D = ∆ M 1 + ∆ M 2 + ∆ M 3 + …. Then substituting for ∆ M i , D = E 1 x [1 + (1 – R ) + (1 – R ) 2 + (1 – R ) 3 + …]. Suppose we multiply both sides by the term (1 – R ) and subtract the resulting product from D . D – (1 – R ) x D = E 1 x [1 + (1 – R ) + (1 – R ) 2 + (1 – R ) 3 + …] – E 1 x [ (1 – R ) + (1 – R ) 2 + (1 – R ) 3 + …]. All terms on the righthand side with the exception of the initial E 1 x 1 would cancel out: D x [1 – (1 – R )] = D x R = E 1 . Finally, divide both sides by R to obtain the desired result: D = E 1 x R 1 . That is, an initial amount of excess reserves equal to E 1 creates new money equal to this amount multiplied by the inverse of the reserve requirement, or m = R 1 ....
View
Full
Document
This note was uploaded on 03/29/2010 for the course EDUCATION 111 taught by Professor Jones during the Spring '10 term at Bowling Green.
 Spring '10
 JONES

Click to edit the document details