Chapter+13+Multiple+Deposit+Creation+and+the+Money+Supply -...

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Chapter 13 Multiple Deposit Creation and the Money Supply Process - Four Players in the Money Supply Process - The Fed’s Balance Sheet - Control of the Monetary Base - Open Market Operation - Discount Loans - Multiple Deposit Creation: A Simple Model - Critique of the Simple Model Motivation : Because deposits at banks are by far the largest component of the money supply, understanding how these deposits are created is the first step in understanding the money supply process. Understand how the money supply is determined. Who controls it? What causes it to change? How might control of it be improved? Four Players in the Money Supply Process 1. The central bank 2. Banks (depository institutions) 3. Depositors (individuals and institutions) 4. Borrowers from banks (individuals and institutions) The Fed’s Balance Sheet Liabilities Currency in circulation—in the hands of the public Reserves—bank deposits at the Fed and vault cash Definition : Total reserves = required reserves + excess reserves 1
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ie, Total reserves can be divided into two categories: reserves that the Fed requires banks to hold (required reserves) and any additional reserves the banks choose to hold (excess reserves). Assets Government securities—the Fed provides reserves to the banking system by purchasing securities, thereby increasing its holdings of these assets. An increase in government securities held by the Fed leads to an increase in the money supply. Discount loans—The Fed can provide reserves to the banking system by making
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This document was uploaded on 10/28/2011 for the course 220 301 at Rutgers.

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Chapter+13+Multiple+Deposit+Creation+and+the+Money+Supply -...

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