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Econ 11:9 - assumes that people firms do not hold on to...

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Fractional reserve banking system With deposits, bank can either make loans, buy bonds or stocks, or keep it in excess reserve Currency + reserves = monetary base Money Supply = Currency + Demand deposits Reserve > deposit Monetary reserve (base) < monetary supply (*****) Money supply / monetary base = (Currency + Deposits) / (Currency + Reserve) - divide top and bottom by D so that we can talk about currency-deposit ratio and reserve requirement - M/B now equals = (cr + 1) / (cr + rr) This is the Money Multiplier o The book will say that this is just 1 / rr, but that is because the book
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Unformatted text preview: assumes that people / firms do not hold on to money and only make deposits (i.e. cr = 0) Money multiplier is always greater than 1 because the reserve ratio is always smaller than 1 R / d is always less than 1- if rr goes down (if the fed asks banks to keep 8% instead of 10% of reserves), then money supply will increase- when cr increases, then M goes down (we can only get this by taking the derivative, so instead just know this as a principle)...
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