1. Multiple Deposit Creation and the Money Supply Process
chapter 16
Multiple Deposit Creation and the Money Supply Process

2. Four Players in the Money Supply Process
1. Central bank: the Fed / People’s Bank of China
Banks
the financial intermediaries that accept deposits and make loans.
Depositors
who have a surplus of funds
Borrowers from banks
who need funds

3. Central bank Emerging of Central bank Unity of money Clears checks
It is a government agency that oversees the banking system and is responsible for the conduct of monetary policy.
Emerging of Central bank
Unity of money
Clears checks
3. Lender of last resort
4. Regulates banks

4. Function of central bank
Issuing bank
Bank’s bank
Government’ s bank

5. Tyes of central bank Single type central bank system （单一式）
Unitary（一元式）binary（二元式）
Compound central bank system（复合式）
Quasi central bank system （准央行制度）
Multinational central bank system（跨国）

6. Fed Balance Sheet

7. Federal reserve system
Assets
Liabilities
Government securities
Discount loans
Currency in circulation
Reserves

8. Liabilities 1.Currency in circulation
Which is the amount of currency in the hands of the public.
2.Reserves
All banks have an account at the Fed in which they hold deposits.
Reserves=deposit in Fed +vault cash=required reserves+ excess reserves

9. Assets 1. government securities Open market operations
2.discount loans
Discount rate

10. The Monetary Base 1. high-powered money 高能货币 MB = C + R
C –currency in circulation
R –reserves
Q: 央行主要通过什么方式来控制MB？

11. Control of the Monetary Base
MB = C + R
Open Market Purchase from Bank
The Banking System The Fed
Assets Liabilities Assets Liabilities
Securities – $100 Securities + $100 Reserves + $100
Reserves + $100
Open Market Purchase from Public
Public The Fed
Securities – $100 Securities + $100 Reserves + $100
Deposits + $100
Banking System
Assets Liabilities
Reserves Checkable Deposits
+ $100 + $100
Result: R  $100, MB  $100

12. If Person Cashes Check Public The Fed
Assets Liabilities Assets Liabilities
Securities – $100 Securities + $ Currency + $100
Currency + $100
Result: R unchanged, MB  $100
Please write the T account, if central bank sell seurities .
To public
To commercial banks
Effect on MB certain, on R uncertain

13. Shifts From Deposits into Currency
Public The Fed
Assets Liabilities Assets Liabilities
Deposits – $100 Currency + $100
Currency + $100 Reserves – $100
Banking System
Assets Liabilities
Reserves – $100 Deposits – $100
Result: R  $100, MB unchanged

14. Case analysis
It is common to read in the newspaper about a Federal reserve intervention to buy or sell dollars in the foreign exchange market.
Can this intervention also be a factor that affects the monetary base?

15. Discount Loans Banking System The Fed
Assets Liabilities Assets Liabilities
Reserves Discount Discount Reserves
+ $100 loan + $100 loan + $ $100
Result: R  $100, MB  $100
Conclusion: Fed has better ability to control MB than R

16. Deposit Creation: Single Bank
When the central bank supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount.
First National Bank
Assets Liabilities
Securities – $100
Reserves + $100
Securities – $100 Deposits + $100
Loans + $100

17. Deposit Creation: Banking System
Bank A
Assets Liabilities
Reserves + $100 Deposits + $100
Reserves + $10 Deposits + $100
Loans + $90
Bank B
Reserves + $90 Deposits + $90
Reserves + $ 9 Deposits + $90
Loans + $81

18. Deposit Creation

19. Deposit Multiplier If Bank A buys securities with $90 check Bank A
Assets Liabilities
Reserves + $10 Deposits + $100
Securities + $90
Seller deposits $90 at Bank B and process is same
Whether bank makes loans or buys securities, get same deposit expansion

20. Deposit Multiplier Simple Deposit Multiplier 1 D =  R rD
Deriving the formula
R = RR = rD  D
D =  R
D =  R

21. Banking System As a Whole
Assets Liabilities
Securities – $100 Deposits + $1000
Reserves + $100
Loans + $1000
Critique of Simple Model
Deposit creation stops if:
1. Proceeds from loan kept in cash
2. Bank holds excess reserves