On the monetary base is much more certain than the

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Unformatted text preview: ect on reserves Shifts from Deposits into Currency Loans to Financial Institutions Monetary liabilities of the Fed have increased by $100 Monetary base also increases by this amount Other Factors that Aect the Monetary Base Float Treasury deposits at the Federal Reserve Interventions in the foreign exchange market Overview of The Fed's Ability to Control the Monetary Base Open market operations are controlled by the Fed The Fed cannot determine the amount of borrowing by banks from the Fed Split the monetary base into two components MBn = MB − BR The money supply is positively related to both the non-borrowed monetary base MBn and to the level of borrowed reserves, BR , from the Fed Multiple Deposit Creation: A Simple Model Deposit Creation Deposit Creation Assume 10% reserve requirement and $100m increase in reserves Deriving the Formula for Multiple Deposit Creation Assuming banks do not hold excess reserves, required reserves (RR)=Total Reserves (RR) RR=required reserve ratio (r) times the total amount of checkable deposits (D ) r ×D = R D= R r ∆D = 1 ∆R r Eco 029 Chapter 10, Chapter 14 Critique of the Simple Model Holding cash stops the process Currency has no multiple deposit expansion Banks may not use all of their excess reserves to buy securities or make loans. Depositors' decisions (how much currency to hold) and bank's decisions (amount of excess reserves to hold) also cause the money supply to change. Eco 029 Chapter 10, Chapter 14 Determining Money Supply Changes in the nonborrowed monetary base MBn The money supply is positively related to the non-borrowed monetary base Changes in borrowed reserves from the Fed The money supply is positively related to the level of borrowed reserves, BR, from the Fed Eco 029 Chapter 10, Chapter 14 Determining Money Supply (c'td) Changes in the required reserves ratio The money supply is negatively related to the required reserve ratio. Changes in currency holdings The money supply is negatively related to currency holdings. Changes in excess reserves The money supply is negatively related to...
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