17-money supply - Money Supply Lecture 17-PREVIEW Dr....

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macroS2010 Lec17-page 1 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Money Supply Lecture 17-PREVIEW Dr. Jennifer P. Wissink ©2009 Jennifer P. Wissink, all rights reserved. March 28, 2010
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macroS2010 Lec17-page 2 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Westley : Who are you? Are we enemies? Why am I on this wall? Where is Buttercup? Inigo Montoya : Let me 'splain. [ pause ] Inigo Montoya : No, there is too much. Let me sum up. Buttercup is marry' Humperdinck in a little less than half an hour. So all we have to do is get in, break up the wedding, steal the princess, make our escape. .. after I kill Count Rugen. Westley : That doesn't leave much time for dilly-dallying. Fezzik : You just wiggled your finger. That's wonderful. Westley : I've always been a quick healer. What are our liabilities? Inigo Montoya : There is but one working castle gate, and. .. and it is guarded by 60 men. Westley : And our assets? Inigo Montoya : Your brains, Fezzik's strength, my steel. Re: Liabilities & Assets
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The Creation of Money – Many banks Assets Liabilities Assets Liabilites Assets Liabilities Assets Liabilities Assets Liabilites Assets Liabilities Assets Liabilities Assets Liabilites Assets Liabilities
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macroS2010 Lec17-page 4 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Creation of Money – Many banks The Creation of Money When There Are Many Banks Panel 1 Panel 2 Panel 3 ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES Reserves 100 100 Deposits Reserves 100 Loans 80 180 Deposits Reserves 20 Loans 80 100 Deposits Reserves 80 80 Deposits Reserves 80 Loans 64 144 Deposits Reserves 16 Loans 64 80 Deposits Reserves 64 64 Deposits Reserves 64 115.20 Deposits Reserves 12.80 64 Deposits Summary: Deposits Bank 1 100 Bank 2 80 Bank 3 64 Bank 4 51.20 . . . . . .
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macroS2010 Lec17-page 5 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Money Multiplier The money multiplier is the multiple by which deposits can increase for every dollar increase in reserves. In the example above, the required reserve ratio is 20%. Each dollar increase in reserves could cause an increase in deposits of $5 when there is no leakage out of the system. An additional $100 of reserves result in additional deposits of $500. K M o n e y m u l t i p l i e r = 1 R e q u i r e d R e s e r v e R a t i o $ =
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macroS2010 Lec17-page 6 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Recall: The Money Multiplier The money multiplier is the multiple by which deposits can increase for every dollar increase in reserves with a fractional reserve system. Suppose rrr=20% Then the Money Multiplier: K $ = 1/rrr So in this example K $ = 1/.2 = 5 So, suppose TR=$100 DDp = $500 So, suppose TR = $22 DDp = $110 So, suppose you want to DDp by $300, then if you know K $ = 5, you need to TR by $60
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macroS2010 Lec17-page 7 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ How the Fed Controls the Money Supply Via changes that change banks’ reserves – particularly excess reserves - which in turn change demand deposits, which in turn change the money supply.
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17-money supply - Money Supply Lecture 17-PREVIEW Dr....

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