The narrowly defined money supply usually abbreviated

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Macroeconomics
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Chapter 9 / Exercise 12
Macroeconomics
Roger A. Arnold
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The narrowly defined money supply, usually abbreviated M1 , is the sum of all coins and paper money in circulation, plus certain checkable deposit balances at banks and savings institutions. The broadly defined money supply, usually abbreviated M2, is the sum of all coins and paper money in circulation, plus all types of checking account balances, plus most forms of savings account balances, plus shares in money market mutual funds. - Figure 2, Two Definitions of the money supply, p. 247 Near Moneys- are liquid assets that are close substitutes for money. Liquidity- refers to asset’s ease with which it can be converted into cash. “Money” consists only of coins, paper money, and checkable deposits. Fractional reserve banking- is a system under which bankers keep as reserves only a fraction of the funds they hold on deposit. Deposit Insurance- a system that guarantees that depositors will not lose money even if their bank goes bankrupt.
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Chapter 9 / Exercise 12
Macroeconomics
Roger A. Arnold
Expert Verified
Moral Hazard- the idea that people insured against the consequences of risk will engage in riskier behaviors. Required Reserves- the minimum amount of reserves (in cash or the equivalent) required by law. Normally, required reserves are proportional to the volume of deposits. Asset- an item of value that the individual or firm owns. Liability- an item of value that the individual or firms owes. Many liabilities are known as debts. Balance Sheet- an accounting statement listing the values of all assets on the left side and the values of all liabilities and net worth on the right side. Net Worth- the value of all assets minus the value of all liabilities. - Table 1, Balance Sheet of Bank, p.251 Deposit Creation- refers to the process by which a fractional reserve banking system turns $1 of bank reserves into several dollars of bank deposits. Excess reserves- are any reserves held in excess of the legal minimum. - Table 2, Changes in Banks Balance Sheet, p. 252 - Table 3, Changes in the Banks Balance Sheet, p. 253 - Table 5 & 6, Changes in the First and Second National Bank, p. 254 Infinite Geometric Progression - Figure 3, The Chain of Multiple Deposit Creation, p. 255 The Money Multiplier- the ratio of newly created bank deposits to new reserves. OVERSIMPLIFIED MONEY MULTIPLIER FORMULA : if the required reserve ration in some fraction, m, the banking system as a whole can convert each $1 of reserves into $1/m in new money. The money multiplier is given by: - Change in money supply = (1/m) X Change in reserves - Table 7 & 8, Changes in balance sheet, p. 256 – 257 Why Money Creation Formula is Oversimplified: When it is accurate 1. Every recipient of cash must redeposit the cash into another bank rather than hold it. 2. Every bank must hold reserves no larger than the legal minimum. If individuals and business firms decide to hold more cash, the multiple expansion of bank deposits will be curtailed because fewer dollars of cash will be available for use as reserves to support checking deposits. Consequently, the money supply will be smaller.

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