ΔD = ΔM / (Fc/D + 1) Variation in the monetary basis ΔM out of:

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Presentation transcript:

ΔD = ΔM / (Fc/D + 1) Variation in the monetary basis ΔM out of: - imbalance of foreign payments balance - loan to banks buying State’s bonds ΔM = ΔD + ΔFc se ΔFc/ΔD = Fc/D ΔFc = (Fc/D) × ΔD ΔM = ΔD + (Fc/D) x ΔD if I divide for ΔD ΔM/ΔD = Fc/D + 1 ΔM = ΔD × (Fc/D + 1) ΔD = ΔM / (Fc/D + 1)

ΔD’ = ΔRn’ + ΔP’ se ΔRn’ /ΔD' =Rn/D se ΔD = ΔRn allora ΔM = ΔRn + ΔFc ΔD’ = ΔRn’ + ΔP’ se ΔRn’ /ΔD' =Rn/D si ha ΔRn’ = ΔD’ / D × Rn ΔD’ = ΔD’ x Rn/D + ΔP’ se divido tutto per ΔD’ 1 = Rn/D + ΔP’/ΔD’ 1 - Rn/D = ΔP’/ΔD’ ΔP’ = ΔD’ × (1 – Rn/D) First impact of newly created monetary base

FINAL RESULTING QUANTITIES 1) ΣD = Σ Δ M / (1 + Fc/D) 2) ΣP = Σ Δ M / (1 + Fc/D) × (1 – Rn/D). 3) ΣD” = Σ Δ M / (1 + Fc/D)2 × (1 – Rn/D) 4) ΣP” = Σ Δ M / (1 + Fc/D)2 × (1 – Rn/D) 2 ΣD = Σ n = 1 Σ Δ M/(Fc/D + 1)n × (1 – Rn/D) (n – 1) ΣP = Σ n = 1 Σ Δ M/(Fc/D + 1)n × (1 – Rn/D) n ΣFc = Σ n = 1 Σ Δ M/(Fc/D + 1)n × (1 – Rn/D) (n – 1) × Fc/D ΣRn = Σ n = 1 Σ Δ M/(Fc/D + 1)n × (1 – Rn/D) (n – 1) × Rn/D

The Multiple Creation of Bank Deposits Instructor Notes: 1) When a bank receives deposits, it keeps 25 percent in reserves and lends 75 percent. 2) The amount lent becomes a new deposit at another bank. 3) The next bank in the sequence keeps 25 percent and lends 75 percent, and the process continues until the banking system has created enough deposits to eliminate its excess reserves. 4) The running tally tells us the amounts of deposits and loans created at each stage. 5) At the end of the process, an additional $100,000 of reserves creates an additional $400,000 of deposits. 59

What is Money?—M1 M1 is the narrowest and most liquid measure of the money supply. It includes financial assets that are immediately available for spending on goods and services. M1 includes: Currency Travelers’ Checks Demand Deposits (checking accounts) Other Checkable Deposits (interest-bearing checking) Demand Deposits and Checkable Deposits are called transactions accounts—these are checking accounts that can be drawn upon to make payments.

The Central Bank The Central Bank’s Policy Tools The three main policy tools are: 1) Open market operations 2) Discount rate 3) Reserve Requirements 23