1. The Central Bank Balance Sheet and the Money Supply Process
Chapter 11
The Central Bank Balance Sheet and the Money Supply Process

2. CONTENS 11.1 The Central Bank’s Balance Sheet
11.2 Changing Central Bank Balance Sheet
11.3 The Deposit Expansion Multiplier
11.4 Monetary Base and the Money Supply
11.5 Arithmetic of Money Multiplier
11.6 Limits on Central Bank’s Control of Money Supply

3. 10.1 The Central Bank’s Balance Sheet
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4. The Central Bank’s Balance Sheet
1. 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

5. The Central Bank’s Balance Sheet
2. Liabilities
Currency
Government Accounts
Reserves
Commercial Bank’s Checking Accounts

6. The Central Bank’s Balance Sheet
3. 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.

7. 11.3 Changing Size and Composition of the Balance Sheet
1. Open Market Operations
The Federal Reserve buys or sells securities in financial markets.

8. Changing Size and Composition of the Balance Sheet
Open Market Operations

9. Changing Size and Composition of the Balance Sheet
2. Foreign Exchange Intervention

10. Changing Size and Composition of the Balance Sheet
Foreign Exchange Intervention

11. Changing Size and Composition of the Balance Sheet
3. Discount Loans

12. Changing Size and Composition of the Balance Sheet
Discount Loans
Discount Loans

13. Changing Size and Composition of the Balance Sheet
4. Cash Withdraws
Cash Withdraws

14. Changing Size and Composition of the Balance Sheet
Cash Withdraws

15. Changing Size and Composition of the Balance Sheet
Cash Withdraws

16. Deposit Expansion Multiplier
Deposit Creation in a Single Bank

17. 11.3 Deposit Expansion Multiplier
1.Deposit Creation in a Single Bank
(1) Types of Reserves
Actual Reserves (R)
Required Reserves (RR=rDD)
Excess Reserves (ER)

18. Deposit Expansion Multiplier
Deposit Creation in a Single Bank

19. Deposit Expansion Multiplier
Deposit Creation in a Single Bank

20. Deposit Expansion Multiplier
Deposit creation in a single bank
(2) As a result of a $100,000 purchases of securities from bank by the Fed
M1 increases $100,000.
Checkable deposits increase $100,000.

21. Deposit Expansion Multiplier
2. Deposit creation by a system of banks
(1) 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.

22. Deposit Expansion Multiplier
Deposit creation by a system of banks

23. Deposit Expansion Multiplier
Deposit creation by a system of banks

24. Deposit Expansion Multiplier
Deposit creation by a system of banks

25. Deposit Expansion Multiplier
Figure 17.17: Multiple Deposit Creation
$100,000
$100,000
Reserves
Reserves
Federal
Reserve
First Bank
$100,000
Office Builders Inc.
Federal
Loan
Reserve
$100,000
$100,000
Securities
Securities
$100,000
Payment
Third Bank
$90,000
$90,000
Second Bank
$100,000
$100,000
American Steel Co.
Deposit
Deposit
Loan
Loan
Retains $9,000 in
Retains $9,000 in
Reserves
Reserves
Retains $10,000
in Reserves
Retains $10,000
in Reserves
$81,000
$81,000
$72,900
$72,900
$65,610
$65,610
Loan
Loan
Fourth Bank
Fifth Bank
Loan
Loan
Loan
Loan
and on
and on
and on.
and on.
Retains $8,100 in
Reserves
Retains $7,290 in
Reserves
Assuming a 10 percent reserve requirement, banks hold
Assuming a 10 percent reserve requirement, banks hold
no excess reserves, and there are no changes its currency holdi
no excess reserves, and there are no changes its currency holdi
ngs.
ngs.

26. Deposit Expansion Multiplier

27. Deposit Expansion Multiplier
3. Deposit creation by a system of banks
RR = rDD or ΔRR = rDΔD
So for every dollar increase in reserves, deposits increase by

28. Deposit Expansion Multiplier
Deposit creation by a system of banks
RD=10% (0.10), and ΔRR=$100,000
ΔD=
ΔD= $1,000,000

29. Deposit Expansion Multiplier
4. Deposit Expansion with Excess Reserves and Cash Withdraws.
(1) Assume:
5% withdraw of cash.
Excess reserves of 5% of deposits

30. Deposit Expansion Multiplier
Deposit Expansion with Excess Reserves and Cash Withdraws.

31. Deposit Expansion Multiplier
(2) 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.

32. Deposit Expansion Multiplier
(3) Deposit Expansion with Excess Reserves and Cash Withdraws.
Ratios
Excess Reserve Ratio {ER/D}
Currency Ratio {C/D}

33. 11.5 Arithmetic of Money Multiplier
Deposit Expansion with Excess Reserves and Cash Withdraws.

34. Deposit Expansion Multiplier
5. 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.

35. Deposit Expansion Multiplier

36. Deposit Expansion Multiplier

37. Deposit Expansion Multiplier

38. Chapter 11
End of Chapter