06+The+Money+Supply+Process

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

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 6-1 The Money Supply Process 6-2 Agenda 1. The Fed’s 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 Fed’s Balance Sheet • The money supply process is based on changes in the central bank’s balance sheet. • This balance sheet consists of: 1. Assets 2. Liabilities 6-4 The Fed’s Balance Sheet • The central bank’s 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 Fed’s Balance Sheet • The central bank’s 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 Fed’s 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 Fed’s Balance Sheet 6-8 The Fed’s 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 Fed’s assets and liabilities increase by exactly the same amount 6-12 Control of the Monetary Base • The Fed buys $100 government bonds – The banking system’s 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 Fed’s open market operations...
View Full Document

This note was uploaded on 07/21/2011 for the course ECON 100B taught by Professor Wood during the Spring '08 term at Berkeley.

Page1 / 13

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

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online