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Determinants of the Money Supply

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Presentation on theme: "Determinants of the Money Supply"— Presentation transcript:

1 Determinants of the Money Supply
The Economics of Money, Banking, and Financial Markets Mishkin, 7th ed. Chapter 16 Determinants of the Money Supply

2 Money Multiplier: M = m × MB
Deriving Money Multiplier R = RR + ER RR: required reserves RR = r  D ER: excess reserves R = (r  D) + ER R: total reserves Adding C (currency) to both sides R + C = MB = (r  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 = (r  D) + (e  D) + (c D) = (r + e + c)  D

3 Money Multiplier: M = m × MB
m < 1/r because no multiple expansion for currency and because as D  ER  Full Model M = m  (MBn + DL)

4 Excess Reserves Ratio Determinants of e
1. i , relative Re on ER  (opportunity cost ), e  2. Expected deposit outflows, ER insurance worth more, e 

5 Factors Determining Money Supply

6 Money Supply

7 Determinants of the Money Supply

8 Deposits at Failed Banks: 1929–33

9 e, c: 1929–33

10 Money Supply and Monetary Base: 1929–33


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