# Ch4.2 - 4.2.2 Demand for Reserves The demand for checkable...

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22 emand for eserves 4.2.2 Demand for Reserves ± The demand for checkable deposits leads to a demands by banks for reserves. ± The relationship between the reserves of banks and the checkable deposits is: R = θ D, where θ is the reserve ratio. people hold d s checkable deposits, the ± If people hold D as checkable deposits, the demand for reserves by banks is: d ) d R = θ (1-c)M 49

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4.2.3 The Demand for Central Bank Money ± The demand for central bank money is defined as he sum of the demand for currency and the t e su o t e de a d o cu e cy a d t e demand for reserves. et d e the demand for central bank money ± Let H be the demand for central bank money. ± The demand for central bank money is equal to the um of the demand for currency and the demand sum of the demand for currency and the demand for reserves. 50
The Demand for Central Bank Money ± H d can be expressed as: H d = CU d + R d eplacing U d nd R d ives: ± Replacing CU and R gives: H d = cM d + θ (1-c) M d = [c+ θ (1-c) ] M d ± Replacing M d gives: H d = [c+ θ (1-c)] \$YL(i). 51

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The Demand for Central Bank Money ± H d = [c+ θ (1-c)]\$YL(i). ± The demand for central bank money is a ede a d o ce ta ba o ey sa decreasing function of the interest rate. ± Why demand for central bank money is negatively yy g y related with interest rate? ² As i increases, individuals hold less money. ,y ² As M d decreases, both currency demand and checkable deposits fall. p ² The lower demand for checkable deposits leads to a decrease in demand for reserves by banks. 52 y
4.3 The Supply and the Demand for Central Bank Money ± Let H be the supply of central bank money. is also called as monetary base or high owered ± H is also called as monetary base or high-powered money. he entral bank controls H ± The central bank controls H. ± In equilibrium, H=H d . ± Replacing H d gives: H = [c+ θ (1-c)]\$YL(i) [ ( )]\$ ( ) 53

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he Supply and the Demand for The Supply and the Demand for Central Bank Money Figure 4 - 7 Determinants of the Demand and the Supply of Central Bank Money 54
4.4 The Determination of the Interest Rate ± The equilibrium interest rate is such that the supply of central bank oney is money is equal to the emand for demand for central bank money.

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## This note was uploaded on 02/19/2011 for the course ECON 1021 taught by Professor Kokwanwai during the Fall '08 term at CUHK.

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Ch4.2 - 4.2.2 Demand for Reserves The demand for checkable...

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