1. Determinants of the Money Supply
chapter 16
Determinants of the Money Supply

2. Money Multiplier
M = m  MB
Deriving Money Multiplier
R = RR + ER
RR = rD  D
R = (rD  D) + ER
Adding C to both sides
R + C = MB = (rD  D) + ER + C
1. Tells us amount of MB needed support D, ER and C
2. $1 of MB in ER, not support D or C
MB = (rDD) +({ER/D}D )+ ({C/D}D)
= (rD + {ER/D} + {C/D})  D

3. 1
D =  MB
rD + {ER/D} + {C/D}
M = D + ({C/D} D ) = (1 + {C/D}) D
1 + {C/D}
M =  MB
m =
m < 1/rD because no multiple expansion for currency and because as D  ER 
Full Model
M = m  (MBn + DL)

4. Excess Reserves Ratio Determinants of {ER/D}
1. i , relative RETe on ER  (opportunity cost ), {ER/D} 
2. Expected deposit outflows, ER insurance worth more, {ER/D} 

5. Discount Loans and Interest Spread
Determinants of DL
1. i , i – id , DL 
2. id , i – id , DL 

6. Factors Determining Money Supply

7. Money Supply

8. Determinants of the Money Supply

9. Deposits at Failed Banks: 1929–33

10. {ER/D}, {C/D}: 1929–33

11. Money Supply and Monetary Base: 1929–33

12. M2 Money Multiplier M2 = D + ({C/D}D) + ({T/D}D) + ({MMF/D}D)
= (1+{C/D}+{T/D}+{MMF/D})  D
1+{C/D}+{T/D}+{MMF/D}
M2 =  MB
rD + {ER/D} + {C/D}
m2 =

13. Factors Determining M2