1. The Federal Reserve System and the Money Supply Process
Chap 13 (8th edition), Mishkin

2. I. The Fed’s balance sheet
Mark as an asset or liability:
Securities (US govt. and agency, banker’s acceptances)
Notes in circulation ($ bills)
3. Discount loans
4. Bank deposits (also known as bank reserves)

3. II. The monetary base (MB) of an economy
The monetary liabilities of the FED, sometimes also referred to as the FED’s monetary liabilities to the private sector =
US Treasury’s monetary liabilities to the private sector =
The Monetary Base (MB) of an economy = =
In symbols, MB = C + R, where C =
R =
MB is also described as high powered money.

4. FED controls MB directly through open market operations and discount loans. The immediate effect of an open market purchase of $100 from banks create the following changes in the T-accounts of the banking system and the FED
The Banking System
Assets Liabilities
Securities
Reserves
The Fed
Assets Liabilities
Securities Reserves (or notes)
What happens to the total reserves and the monetary base of the economy? What happens if there is a open market sale?

5. The immediate effect of new discount loans made by the FED to the banks is,
Banking System The Fed
Assets Liabilities Assets Liabilities
Reserves Discount Discount Reserves or notes
loan loan
What is the effect on R and MB?
What happens if the bank pays off some of its loans to the FED?

6. What happens to total reserves, monetary base?
Suppose the FED makes the purchase from the non-bank public and pays for it with a check. The check is deposited at a local bank.
Non Bank Public The Fed
Assets Liabilities Assets Liabilities
Securities Securities Reserves
Deposits (or notes)
Banking System
Assets Liabilities
Reserves Checkable Deposits
What happens to total reserves, monetary base?
What happens if the non-bank public converts the check into currency and prefers holding cash?

7. III. Multiple Deposit Creation:
We now show that an open market purchase of $100 creates _____________. Thus although MB goes up by $100, M1 ______________
First National Bank (initial position after open market purchase)
Assets Liabilities
Securities
Reserves
First National Bank (final position)
Loans

8. Multiple Deposit Creation: Banking System
Bank A (initial position)
Assets Liabilities
Reserves Deposits
Bank A (final position)
Loans
Bank B (initial position)
Bank B (final position)

9. Total new checkable deposits created by banks A - … as a result of a $100 increase in the monetary base is
In symbols, if ΔR = initial increase in reserves, r = required reserve ratio, then total increase in checkable deposits by the banking system as a whole is,
1/r is defined as the _______________.
The amount of new deposits created is less than _______ if,
people prefer _________________
banks prefer __________________

10. For the interested student who wants to know more about the monetary tools used by the FED, not important for the final

11. Monetary policy tools – open market operations and how it influences the federal funds rate
supply of
overnight reserves
demand for
overnight reserves
demand for
overnight reserves
quantity of reserves
quantity of reserves
demand and supply of federal funds, before an open market operations
demand and supply of federal funds, after an open market operations

12. Monetary policy tools – changes in the discount rate and how it influences the federal funds rate
supply of
overnight reserves S1
demand for
overnight reserves
demand for
overnight reserves
quantity of reserves
quantity of reserves
demand and supply of federal funds, before a change in the discount rate
demand and supply of federal funds, after a change in the discount rate