chapter 16 Determinants of the Money Supply Money

Money Multiplier M = m MB Deriving Money Multiplier R = RR + ER

D= 1 MB r. D + {ER/D} + {C/D} M = D + ({C/D}

Excess Reserves Ratio Determinants of {ER/D} e 1. i , relative RET on ER

Discount Loans and Interest Spread Determinants of DL 1. i , i – id

Factors Determining Money Supply Copyright © 2001 Addison Wesley Longman TM 16 - 6

Money Supply Copyright © 2001 Addison Wesley Longman TM 16 - 7

Determinants of the Money Supply Copyright © 2001 Addison Wesley Longman TM 16 -

Deposits at Failed Banks: 1929– 33 Copyright © 2001 Addison Wesley Longman TM 16

{ER/D}, {C/D}: 1929– 33 Copyright © 2001 Addison Wesley Longman TM 16 - 10

Money Supply and Monetary Base: 1929– 33 Copyright © 2001 Addison Wesley Longman TM

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chapter 16 Determinants of the Money Supply

Money Multiplier M = m MB Deriving Money Multiplier R = RR + ER RR = r. D D R = (r. D D) + ER Adding C to both sides R + C = MB = (r. D D) + ER + C 1. Tells us amount of MB needed support D, ER and C 2. $1 of MB in ER, not support D or C MB = (r. D D) +({ER/D} D )+ ({C/D} D) = (r. D + {ER/D} + {C/D}) D Copyright © 2001 Addison Wesley Longman TM 16 - 2

D= 1 MB r. D + {ER/D} + {C/D} M = D + ({C/D} D ) = (1 + {C/D}) D M= 1 + {C/D} MB r. D + {ER/D} + {C/D} m = 1 + {C/D} r. D + {ER/D} + {C/D} m < 1/r. D because no multiple expansion for currency and because as D ER Full Model M = m (MBn + DL) Copyright © 2001 Addison Wesley Longman TM 16 - 3

Excess Reserves Ratio Determinants of {ER/D} e 1. i , relative RET on ER (opportunity cost ), {ER/D} 2. Expected deposit outflows, ER insurance worth more, {ER/D} Copyright © 2001 Addison Wesley Longman TM 16 - 4