16+The+Money+Supply+Process - Agenda 1. The Feds Balance...

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1 16-1 The Money Supply Process 16-2 Agenda 1. The Fed’s Balance Sheet 2. Control of the Monetary Base 3. Multiple Deposit Creation 4. The Money Multiplier 5. Factors that Determine the Money Supply 16-3 The Fed’s Balance Sheet The money supply process is based on changes in the central bank’s balance sheet. This balance sheet consists of: 1. Assets 2. Liabilities 16-4 The Fed’s Balance Sheet The central bank’s assets include: 1. Government securities Acquired through open market operations 2. Discount loans to depository institutions Banks’ borrowings from the central bank or borrowed reserves Borrowing rate is call the discount rate
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2 16-5 The Fed’s Balance Sheet The central bank’s liabilities include: 1. Currency in circulation Held by the non-bank public 2. Reserves Bank reserves held at the central bank Vault cash 16-6 The Fed’s Balance Sheet Reserves can be of two types: 1. Required reserves —the legal minimum that banks must hold against their deposits The required reserve ratio, rr 2. Excess reserves —additional reserves that banks choose to hold above their required reserves 16-7 The Fed’s Balance Sheet 16-8 The Fed’s Balance Sheet A central bank “creates” money when: 1. It acquires real assets from the public. 2. The liabilities it issues are money. These liabilities are called: 1. The monetary base or 2. High-powered money
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3 16-9 Control of the Monetary Base •T h e monetary base , MB, equals 1. Currency in circulation , C PLUS 2. Reserves in the banking system , R •o r MB = C + R 16-10 Control of the Monetary Base Reserves are affected by: 1. The Fed’s open-market operations, 2. The public’s money asset mix, and 3. Bank borrowings from the Fed. 16-11 Control of the Monetary Base 1. Suppose the Fed buys $100 of government securities from the public. 16-12 Control of the Monetary Base 1. Suppose the Fed buys $100 of government securities from the public:
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4 16-13 Control of the Monetary Base 2. Suppose the public increases their currency holdings by $100.
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This note was uploaded on 03/13/2012 for the course ECON 100B taught by Professor Wood during the Fall '08 term at University of California, Berkeley.

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16+The+Money+Supply+Process - Agenda 1. The Feds Balance...

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