lec09_01 - ECON4721 Money and Banking Lecture 09_01 Satoshi...

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Unformatted text preview: ECON4721 Money and Banking Lecture 09_01 Satoshi Tanaka University of Minnesota December 2, 2011 Satoshi Tanaka ECON4721 Money and Banking Lecture 09_01 ECON4721 Money and Banking Mapping The Model to The Real World Satoshi Tanaka ECON4721 Money and Banking Lecture 09_01 Today's Question How does the government control the money supply in the real world? What's its e ect on banking sector? Important issues: Reserve requirement High-powered money (monetary base) Satoshi Tanaka ECON4721 Money and Banking Lecture 09_01 Reserve Requirement Remember the Model of Liquidity. Two assets: Capital and money . Banking allows consumers to have deposits instead of holding at money. Bank deposits are a form of inside money . Satoshi Tanaka ECON4721 Money and Banking Lecture 09_01 Reserve Requirement No one holds at money? That's not true in the real world. De nition (Reserve requirements) A bank must keep a certain fraction of its deposits in the form of at money. Recall what a bank did: take deposits and lend them out by making investments in capital. Reserve requirement states that a bank must not lend out a certain minimum fraction of all the deposits it receives, but keep it in the form of money. What's the e ect? Satoshi Tanaka ECON4721 Money and Banking Lecture 09_01 Setup Three periods model. There are two assets; money and capital. Assume the rate of return on capital X > 1. Satoshi Tanaka ECON4721 Money and Banking Lecture 09_01 Review of the Week Banker's action period t borrow b from young at rate of return 1 , investb in capital period t + 1 borrow b from young at rate of return 1, pay back b for loan from t period t + 2 get Xb- return on capital, pay back b for loan from t + 1 Final pro t for banker: Xb- b = ( X- 1 ) b > The banker gets pro t X- 1 for each unit of goods borrowed in the rst period....
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