rr = reserve requirement = 0.10 RR = required reserves, ER = excess reserves Wells Fargo Citibank Chase A L + SE A L + SE A L + SE 1 Res +$1,000 Dep +$1,000 1 3 Res +$900 Dep +$900 2 5 Res +$810 Dep +$810 4 RR +$100 RR +$90 RR +$81 ER +$900 ER +$810 ER +$729 Loans +$900 2 4 Loans +$810 Loans +$729 Res -$900 5 Res -$810 3 ER -$900 ER -$810 $1,000 $900 $810

Simple deposit multiplier d = simple deposit multiplier = 1 𝑟𝑟 Ex. – d = 1 / 0.10 = 10 ∆ MS = ∆ money supply = multiplier * ∆ reserves Ex. - ∆ MS = 10 * $1,000 = $10,000

People hold some assets in cash instead of deposits c. Money multiplier People hold some assets in cash instead of deposits c = currency deposit / ratio = portion of assets held in cash Banks may not make maximum possible loans e = excess reserve ratio = reserves held on top of required reserves mm = money multiplier = 1 + 𝑐 𝑐+𝑟𝑟+𝑒 Ex. – c = 0.10, e = 0.05 => mm = (1 + 0.10) / (0.10 + 0.10 + 0.05) = 4.4 ∆ MS = 4.4 * $1,000 = $4,400

FRB NY Wells Fargo Citibank Chase ∆ MS = 10 * +$100 M = +$1 B L + SE A L + SE A L + SE A L + SE 1 Secs +$100 M Res (Wells) +$100 M 1 Secs -$100 M 4 Res +$100 M Dep +$100 M Res +$90 M Dep +$90 M 3 6 5 2 2 Res +$100 M RR +$10 M RR +$9 M 4 -$100 M RR +$0 M ER +$90 M ER +$81 M Res (Citi) +$100 M 4 ER +$100 M 5 Loans +$90 M Loans +$81 M 3 Loans +$100 M 6 -$90 M 6 Res -$90 M Res (Chase) +$90 M 4 Res -$100 M ER -$90 M 6 ER -$100 M ∆ MS = 10 * +$100 M = +$1 B $100 M $90 M ∆ MS = 4.4 * +$100 M = +$440 M

FRB NY Wells Fargo Citibank Chase ∆ MS = 10 * -$100 M = -$1 B L + SE A L + SE A L + SE A L + SE 1 Secs -$100 M Res (Wells) -$100 M 1 Secs +$100 M 4 Res -$100 M Dep -$100 M Res -$90 M Dep -$90 M 3 6 5 2 2 Res -$100 M RR -$10 M RR -$9 M 4 +$100 M RR +$0 M ER -$90 M ER -$81 M Res (Citi) -$100 M 4 ER -$100 M 5 Loans -$90 M Loans -$81 M 3 Loans -$100 M 6 +$90 M 6 Res +$90 M Res (Chase) -$90 M 4 Res +$100 M ER +$90 M 6 ER +$100 M ∆ MS = 10 * -$100 M = -$1 B $100 M $90 M ∆ MS = 4.4 * -$100 M = -$440 M

(c ) Securities’ prices and interest rates Ex. Coupon = 50 Price = 1000 => Rate = 50 1000 = 5% Price = 800 => Rate = 50 800 = 6.25% Price = 1250 => Rate = 50 1250 = 4% Buy securities => price of securities increases => interest rate decreases Sell securities => price of securities decreases => interest rate increases

4. Money market

a. Supply of money Look at real money supply RLMS1 RLMS2 r RLMS = MS / P RLMS = f (r, MS, P) (0) (+) (-) MS or P => RLMS M/P

b. Demand for money Holding money means interest not earned More transactions as income increases => more money needed r RLMD = MD / P = f(r, Y) (-) (+) Y => RLMD RLMD1 RLMD2 M/P

c. Equilibrium r RLMS r* RLMD (M/P)* M/P

d. Changes (1) Changes in money supply r RLMS2 RLMS0 RLMS1 RLMD M/P

d. Changes (2) Changes in money demand r RLMS Y => RLMD0 -> RLMD1 r1 => r r0 Y => RLMD0 -> RLMD2 => r r2 RLMD1 RLMS2 RLMD0 M/P