24 deriving the money mulplier we will abandon the two

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: B Liabili<es +$90 Checkable deposits Assets +$90 Reserves Loans Liabili<es +$9 Checkable +$81 deposits +$90 •  The same process will con<nue. 18 Deposit Crea<on: The Banking System •  Overall changes in deposits, loans, and reserves with the ini<al $100 increase in reserves. $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Total Change in Deposits Total Change in Loans Total Change in Reserves 0 5 10 15 20 25 30 35 40 45 50 # of Banks 19 Deposit Crea<on: Inves<ng in Securi<es •  With the addi<onal reserves, the banks can invest in securi<es, rather than making loans. •  Inves<ng in securi<es will give us the same result. Bank A Assets Reserves Bank A Liabili<es +$100 Checkable deposits +$100 Assets Reserves SecuriDes Liabili<es +$10 Checkable +$90 deposits +$100 •  The bank writes a $90 check to the seller of the securi<es, who in turn deposits the $90 at another bank, such as Bank B. •  Regardless of making loans or buying securi<es, the effect on deposit expansion is the same. 20 The Formula for Mul<ple Deposit Crea<on •  Assume that banks do not hold excess reserves. •  Required Reserves (RR) = Total Reserves (R) •  RR = r × D where r = required reserve ra<o D = checkable deposits •  r × D = R D = R/r (dividing both sides by r) Taking the change of both sides, = 21 Cri<que of the Simple Model •  Holding cash stops the process. –  If Bank A’s loans are all kept in cash, nothing will be deposited at Bank B. –  No further crea<ons are possible. •  Banks may not use all of their excess reserves to buy securi<es or make loans. –  In an extreme case, Bank A may keep all excess reserves. –  No loans can be made, so that no deposit crea<ons. •  Depositors’ decisions and bank’s decision also cause the money supply to change. 22 The Money Mul<plier •  As we have seen, the Fed has beler control on the monetary base than on reserves. •  Link money supply (M) to the monetary base (MB) and let m denote the money mul<plier: M = m × MB •  Note m > 1. ⇒ A $1 change in the monetary base leads to more than a $1 change in the money supply. 23 The Money Mul<plier •  The money mul<...
View Full Document

This note was uploaded on 02/02/2013 for the course ECON 2035 taught by Professor Stahl during the Fall '08 term at LSU.

Ask a homework question - tutors are online