Presentation is loading. Please wait.

Presentation is loading. Please wait.

Multiple Deposit Creation and the Money Supply Process

Similar presentations


Presentation on theme: "Multiple Deposit Creation and the Money Supply Process"— Presentation transcript:

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


Download ppt "Multiple Deposit Creation and the Money Supply Process"

Similar presentations


Ads by Google