1. How is the banking system like a magnifying glass?
BERNANKE

6. Let’s assume that banks are “fully loaned up” and that we know the magnitudes of C, R, and r.
M = C + R/r
M = /0.2
M = = 600

7. Sometimes people choose to deposit more of their money in banks….
BERNANKE

9. M = C + R/r
M = /0.2
M = = 600 50
150 50
750
800

10. Sometimes people withdraw their money from banks….
BERNANKE

12. M = C + R/r
M = /0.2
M = = 600
150 50
150
250
400

13. Sometimes the Board of Governors decreases the required reserve ratio….
BERNANKE

15. M = C + R/r
M = /0.2
M = = 600
0.1333
750
850

16. Sometimes the Board of Governors decreases the discount rate….
BERNANKE

18. M = C + R/r
M = /0.2
M = = 600
150
750
850

19. Sometimes the FOMC decides to buy more Treasury bills….
BERNANKE

21. M = C + R/r
M = /0.2
M = = 600
150
750
850

22. In late 1999, a lot of people were worried about Y2K because….
BERNANKE

26. We know that M = C + D.
Let’s define the monetary base (B) as
B = C + R
We know that R = rD.
Let’s recognize that people make their own choices about the preferred ratio of currency to checking-account money. That is, k = C/D.
We can write C = kD, where k is the preferred proportion.
So, M = C + D = kD + D = (k + 1)D
And B = C + R = kD + rD = (k + r)D

27. So, M = C + D = kD + D = (k + 1)D
And B = C + R = kD + rD = (k + r)D

28. = = M = B MB (k + 1)D (k + r)D (k + 1) (k + r) (k + 1) (k + r)
So, M = C + D = kD + D = (k + 1)D
And B = C + R = kD + rD = (k + r)D MB
(k + 1)D
(k + r)D
(k + 1)
(k + r) = =
(k + 1)
(k + r) M = B

29. M = B Suppose we know: C = 500 and R = 100, k = 0.80 and r = 0.10.
Can you calculate M?
(k + 1)
(k + r) M = B
B = C + R
B =
B = 600
M = [(k + 1)/(k + r)] B
M = [( )/( ](600)
M = [1.80/0.90](600)
M = 2(600)
M = 1200

30. M = B (k + 1) (k + r) C = 500; R = 200 r = 0.10; k = 0.25
Calculate M---using the equation M = C + R/r
M = C + R/r = /0.10 = = 2,500
Calculate M again, this time taking “k” into account.
M = (k + 1)/(k + r) [C + R]
M = ( )/( )[ ]
M = 1.25/0.35 [700] = 25/7 [700] = 2,500

31. M = B (k + 1) (k + r) C = 500; R = 200 r = 0.10; k = 0.25
Let the Fed add 70 worth of reserves.
Calculate M---using the equation M = C + R/r
M = C + R/r = /0.10 = = 3,200
Calculate M again, this time taking “k” into account.
M = (k + 1)/(k + r) [C + R]
M = ( )/( )[ ]
M = 1.25/0.35 [700] = 25/7 [770] = 2,750

32. M = B (k + 1) (k + r) C = 500; R = 200 r = 0.10; k = 0.25
Let the Fed adds 70 worth of reserves.
Explain the difference in results by calculating C & R.
M = C + R/r = /0.10 = ,700 = 3,200
C = 500; R = D = 2,700
Note, however, that k = C/D = 500/2,700 = 0.185

33. M = B (k + 1) (k + r) C = 500; R = 200 r = 0.10; k = 0.25
Let the Fed adds 70 worth of reserves.
Explain the difference in results by calculating C & R.
M = (k + 1)/(k + r) [C + R]
M = ( )/( )[ ]
M = 1.25/0.35 [700] = 25/7 [770] = 2,750
M = C + D = kD + D = (k + 1)D
D = M/(1 + k) = 2,750/( ) = 2,750/1.25 = 2,200
R = rD = 0.10(2,200) = 220
C = B – R = 770 – 220 = 550
k = C/D = 550/2,200 = 0.25