Chapter 16 Determinants of the Money Supply Money

Chapter 16 Determinants of the Money Supply

Money Multiplier M = m MB Deriving Money Multiplier R = RR + ER RR = r D R = (r D) + ER Adding C to both sides R + C = MB = (r 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) + (e D) + (c D) = (r + e + c) D © 2004 Pearson Addison-Wesley. All rights reserved 2

D= 1 MB r+e+c M = D + (c D ) = (1 + c) D M= 1+c MB r+e+c m = 1+c r+e+c m < 1/r because no multiple expansion for currency and because as D ER Full Model M = m (MBn + DL) © 2004 Pearson Addison-Wesley. All rights reserved 3

Excess Reserves Ratio Determinants of e 1. i , relative Re on ER (opportunity cost ), e 2. Expected deposit outflows, ER insurance worth more, e 4

Factors Determining Money Supply © 2004 Pearson Addison-Wesley. All rights reserved 5

Money Supply © 2004 Pearson Addison-Wesley. All rights reserved 6

Determinants of the Money Supply © 2004 Pearson Addison-Wesley. All rights reserved 7

Deposits at Failed Banks: 1929– 33 © 2004 Pearson Addison-Wesley. All rights reserved 8

e, c: 1929– 33 © 2004 Pearson Addison-Wesley. All rights reserved 9

Money Supply and Monetary Base: 1929– 33 © 2004 Pearson Addison-Wesley. All rights reserved 10