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Unformatted text preview: rr Then, M s = [(cr + 1) / (cr + rr)] x B = m x B the money supply is proportional to the monetary base B . The coefficient of proportionality m is called money multiplier . money supply is determined not only by the central bank’s policy, but also by the behaviour of households, which hold money, and of banks, where money is held financial intermediation – transferring the economy’s resources from economic agents who wish to save to those who wish to borrow. most prominent examples of financial intermediaries are the stock market, the bond market, and the banking system only banks have the legal authority to create assets that are part of money supply (such as checking accounts); banks are the only financial institutions that directly influence money supply, banks create money (through fractional-reserve banking) Money demand represents the amount of monetary assets that people are willing to hold (instead of illiquid assets)....
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This note was uploaded on 11/02/2011 for the course ECON 314 taught by Professor Rakovski during the Fall '11 term at McGill.
- Fall '11