Chapter 17 The Central Bank Balance Sheet and
Chapter 17 The Central Bank Balance Sheet and the Money Supply Process Mc. Graw-Hill/Irwin Copyright © 2006 by The Mc. Graw-Hill Companies, Inc. All rights reserved.
The Central Bank’s Balance Sheet Web Link 2
The Central Bank’s Balance Sheet Assets • Securities • Fed holds only U. S. Treasury securities • controlled through purchases and sales known as “open market operations. ” • Foreign Exchange Reserves • bonds issued by foreign governments • Loans • Discount Loans • Float 3
The Central Bank’s Balance Sheet Liabilities • Currency • Government Accounts • Reserves • Commercial Bank’s Checking Accounts 4
The Monetary Base (or High-Powered Money) • Currency held by the public + reserves in the banking system • Bank Reserves = Vault Cash + Deposits at the Fed. • The central bank can control the size of the monetary base. 5
Changing Size and Composition of the Balance Sheet Open Market Operations • The Federal Reserve buys or sells securities in financial markets. 6
Changing Size and Composition of the Balance Sheet Open Market Operations 7
Changing Size and Composition of the Balance Sheet Foreign Exchange Intervention 8
Changing Size and Composition of the Balance Sheet Foreign Exchange Intervention 9
Changing Size and Composition of the Balance Sheet Discount Loans 10
Changing Size and Composition of the Balance Sheet Discount Loans • Discount Loans 11
Changing Size and Composition of the Balance Sheet Cash Withdraws • Cash Withdraws 12
Changing Size and Composition of the Balance Sheet Cash Withdraws 13
Changing Size and Composition of the Balance Sheet Cash Withdraws 14
Deposit Expansion Multiplier Deposit Creation in a Single Bank 15
Deposit Expansion Multiplier Deposit Creation in a Single Bank Types of Reserves • Actual Reserves (R) • Required Reserves (RR=r. DD) • Excess Reserves (ER) 16
Deposit Expansion Multiplier Deposit Creation in a Single Bank 17
Deposit Expansion Multiplier Deposit Creation in a Single Bank 18
Deposit Expansion Multiplier Deposit creation in a single bank • As a result of a $100, 000 purchases of securities from bank by the Fed • M 1 increases $100, 000. • Checkable deposits increase $100, 000. 19
Deposit Expansion Multiplier Deposit creation by a system of banks • Assume • Bank hold no excess reserves. • The reserve requirement ratio is 10% • Currency holding doe not change when deposits and loans change. • When a borrower writes a check, none of the recipients of the funds deposit them back in the bank that initially made the loan. 20
Deposit Expansion Multiplier Deposit creation by a system of banks 21
Deposit Expansion Multiplier Deposit creation by a system of banks 22
Deposit Expansion Multiplier Deposit creation by a system of banks 23
Deposit Expansion Multiplier Figure 17. 17: Multiple Deposit Creation $100, 000 Reserves Federal Reserve Third Bank First Bank $100, 000 Loan Office Builders Inc. $100, 000 Securities $90, 000 Loan Retains $9, 000 in Reserves $81, 000 Loan Fourth Bank Retains $8, 100 in Reserves $100, 000 Payment Second Bank $100, 000 Deposit Retains $10, 000 in in Reserves $72, 900 Loan Fifth Bank American Steel Co. $65, 610 Loan Retains $7, 290 in Reserves Assuming a 10 percent reserve requirement, banks hold no excess reserves, and there are no changes its currency holdings. and on. 24
Deposit Expansion Multiplier 25
Deposit Expansion Multiplier Deposit creation by a system of banks • RR = r. DD or ΔRR = r. DΔD • So for every dollar increase in reserves, deposits increase by 26
Deposit Expansion Multiplier Deposit creation by a system of banks • RD=10% (0. 10), and ΔRR=$100, 000 • ΔD= $1, 000 27
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws. Assume: • 5% withdraw of cash. • Excess reserves of 5% of deposits 28
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws. 29
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws. • The desire of banks to hold excess reserves and the desire of account holders to withdraw cash both reduce the impact of a given change in reserves on the total deposits in the system. The more excess reserves banks desire to hold, and the more cash that is withdrawn, the smaller the impact. 30
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws. Ratios • Excess Reserve Ratio {ER/D} • Currency Ratio {C/D} 31
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws. 32
Deposit Expansion Multiplier The Quantity of Money (M) Depends on: • The Monetary base (MB), Controlled by the Fed. • Reserve Requirements • Bank’s desired to hold excess reserves. • The public’s demand for currency. 33
Deposit Expansion Multiplier 34
Deposit Expansion Multiplier 35
Deposit Expansion Multiplier 36
Chapter 17 End of Chapter Mc. Graw-Hill/Irwin Copyright © 2006 by The Mc. Graw-Hill Companies, Inc. All rights reserved.
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