06+The+Money+Supply+Process

06+The+Money+Supply+Process - 1 6-1 The Money Supply...

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Unformatted text preview: 1 6-1 The Money Supply Process 6-2 Agenda 1. The Feds Balance Sheet 2. Control of the Monetary Base 3. Multiple Deposit Creation 4. The Money Multiplier 5. Factors that Determine the Money Supply 6-3 The Feds Balance Sheet The money supply process is based on changes in the central banks balance sheet. This balance sheet consists of: 1. Assets 2. Liabilities 6-4 The Feds Balance Sheet The central banks assets include: 1. Government securities Acquired through open market operations 2. Discount loans to depository institutions Banks borrowings from the central bank or borrowed reserves Borrowing rate is call the discount rate 2 6-5 The Feds Balance Sheet The central banks liabilities include: 1. Currency in circulation Held by the non-bank public 2. Reserves Bank reserves held at the central bank Vault cash 6-6 The Feds Balance Sheet Reserves can be of two types: 1. Required reserves the legal minimum that banks must hold against their deposits The required reserve ratio, rr 2. Excess reserves additional reserves that banks choose to hold above their required reserves 6-7 The Feds Balance Sheet 6-8 The Feds Balance Sheet A central bank creates money when: 1. It acquires real assets from the public 2. The liabilities it issues are money These liabilities are called: 1. The monetary base or 2. High-powered money 3 6-9 Control of the Monetary Base The monetary base , MB, equals 1. Currency in circulation , C PLUS 2. Reserves in the banking system , R or MB = C + R 6-10 Control of the Monetary Base The Fed changes the monetary base primarily through open market operations. 1. Open market purchases increase the monetary base 2. Open market sales decrease the monetary base 6-11 Control of the Monetary Base The Fed buys $100 government bonds: The Feds assets and liabilities increase by exactly the same amount 6-12 Control of the Monetary Base The Fed buys $100 government bonds The banking systems mix of assets changes Reserves and the monetary base increase 4 6-13 Control of the Monetary Base Reserves in the banking system can change from events other than the Feds open market operations...
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06+The+Money+Supply+Process - 1 6-1 The Money Supply...

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