Econ Dev 7

# Econ Dev 7 - rr Then M s =(cr 1(cr rr x B = m x B the money...

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ECON 314 Oct.4 The central bank controls money supply indirectly by altering either the monetary base (the total amount of local currency held by the public as currency C and by the banks as reserves R ) or the reserve-deposit ratio (the fraction of deposits that banks are required to hold as reserve) using these monetary policy instruments: Open-market operations: purchases and sales of government bonds by the central bank Reserve requirements: minimum reserve-deposit ratio imposed on banks by the central bank Discount rate: interest rate that central bank charges when it makes loans to banks Money supply is the sum of currency and demand deposits: M s = C + D Monetary base is the sum of currency and bank reserves: B = C + R Then, M s /B = (C + D) / (C + R) M s /B = [(C/D) + 1] / [(C/D + (R/D)] C/D is the currency-deposit ratio cr (reflects preferences of the public about how much money to hold in the form of currency C and how much to hold in the form of demand deposits D ) R/D is the reserve-deposit ratio

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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.

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Econ Dev 7 - rr Then M s =(cr 1(cr rr x B = m x B the money...

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