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Lecture20 - Announcements Problem sets to remainder of...

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1 Announcements: Problem sets to remainder of course PS8 due today PS9 due Dec 7 Readings: This week Mankiw, Money Supply, Chapter 19, Section 1 only (pp. 547-556) Primer from SF Fed: http://www.frbsf.org/publications/federalreserve/ monetary/tools.html Ball-Mankiw, Financial Crises chapter (CTools) “‘Quantitative easing’ is unloved and unappreciated—but it is working,” Economist Nov 6, 2010 (CTools) Mankiw, Stabilization Policy, Chapter 15 (skim)
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2 Money supply and the banking system Banking system Endogenous money From monetary base to money Money supply M = money supply Curr = Currency R = Reserves (held by banks against deposits) Monetary base = Currency + Reserves = Curr + R 100% Reserve Banking Bank deposits for convenience and safety No effect on money supply from moving currency from public to bank vaults Bank of Amsterdam (founded 1609) Took deposits Charged a fee (negative interest), 0.25% Exchange of receipts for deposits
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3 Bank Balance Sheet: 100% Reserve Banking Assets Liabilities Reserves Deposits $1000 $1000 100% Reserve Banking Banking does not affect money supply Money = Currency + Reserves = Currency + Deposits With 100% reserve, choice to deposit currency does not change money stock Fractional reserve banking Banks would like to make loans Not all depositors will demand deposits simultaneously Some fraction of deposits can be lent out
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4 Bank Balance Sheet: Fractional Reserve Banking Initial deposit = $1000 Assets Liabilities Reserves Deposits $100 $1000 Loans $900 Reserve ratio of 10% Fractional Reserve Banking Only a fraction of deposits held as reserve Remaining deposit loans Loans lead to further deposits Additional deposits/reserves more loans Etc…. Bank Balance Sheet: Fractional Reserve Banking— Second round Assets Liabilities Reserves Deposits $100 $1000 Loans $900 $900 $810 $90 New total $1900 New total $1900
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5 Multiple rounds of deposits and loans with fractional reserve banking rr = reserve ratio (10% in example) total deposits = initial deposit x {1 + (1-rr) + (1-rr) 2 + (1-rr) 3 + …} Multiple rounds of deposits and loans with fractional reserve banking 2 3 total deposit = initial deposit 1 (1 ) (1 ) (1 ) ... rr
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