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ECON 1102 Week 7 post lecture

3 m3 m1 plus all bank deposits of the private

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Unformatted text preview: 3. M3: M1 plus all bank deposits of the private non-bank sector. (currency + bank deposits of households and businesses in cheque and savings accounts + all other bank deposits held by households and businesses) 4. Broad money: M3 plus deposits of households and businesses held by non banks (building societies, credit unions). 36 TABLE 7.1 Currency, M1, M3 and broad money in Australia, February 2010 ($ billion) Source: Reserve Bank of Australia (February 2010), Statistical Bulletin. Money supply (M3) consists of currency + bank deposits. amount of money also depends on the behaviour of commercial banks and their depositors How banks influence money supply Demand deposits (in banks) are redeemable in cash on demand. Banks retain a fraction of deposits as reserves (RESERVE RATIO = reserves/deposits ). The remainder they can lend out. When Banks have excess reserves (actual reserve ratio exceeds desired ratio) they are able to make loans and therefore create money => Banks create money by making loans 38 Assets of Bank Liabilities of Bank Reserves: $1,000 Deposits: $1,000 39 The money supply increases by $1,000 – the initial deposit Assets of Bank Liabilities of Bank Reserves: $100 (10% deposits) Deposits: $1,000 Loans: $900 40 Assets of Bank Liabilities of Bank Reserves: $100 (10% deposits) [new reserves: $900] Deposits: $1,000 Loans: $900 (Additional) Deposits: $900 41 The money supply is now $1,900 (total bank deposits) the banks have created money. Since reserves/deposits = 1,000/1,900 = 52.6% ( > 10%) banks can make more loans ….. Assets of Bank Liabilities of Bank Reserves: $100 (10% deposits) [+ reserves: $90] Deposits: $1,000 Loans: $900 (Additional) Loans: $810 (Additional) Deposits: $900 (Additional) Deposits: $810 42 etc…….. Assets of Bank Liabilities of Bank Reserves: $1,000 Initial Deposit: $1,000 Loans: $9,000 Subsequent Deposits: $9,000 Total assets: $10,000 Total liabilities: $10,000 43 The money supply has increased by $10,000 10 x the initial deposit Deposit Multiplier = 1 . = 1/.01 = 10 desired reserve/deposit ratio (Final) Bank Deposits (change in Money Supply) = Bank Reserves (Initial Deposit) x Deposit Multiplier = $1,000 x 10 = $10,000 44 10% Assumptions so far no currency, no government, closed economy Assets of Bank Liabilities of Bank Reserves: $500 Loans: $4,500 Deposits: $500 Additional deposits: $4,500 Total Deposits: $5,000 45 Money supply = currency held by public + bank deposits D money supply = $500 + Initial deposit x deposit multiplier = $500 + [$500 x 10] = $500 + $5000 (Total Deposits) = $5,500 Money supply influenced by currency, deposits, reserve ratio 1/(reserves/ deposits ratio) $1,000 is deposited in a bank. The reserves to deposit ratio (the reserve ratio) is 5%. By how much does the money supply change? Money supply = currency + bank deposits D money supply = D currency + D bank deposits = 0 + initial deposit x money multiplier = 0 + initial deposit x 1/reserve ratio = 0 + $1,000 x 1/0.05 = $1,000 x 20 = $20,000 What if $500 is kept as currency by households?...
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3 M3 M1 plus all bank deposits of the private non-bank...

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