1. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. CHAPTER 8 Who Controls the Money Supply and How?

2. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-1 M 2 Money Supply ≡ M 2 Money Multiplier  Monetary Base

3. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-2 Framework for Conceptualizing Causes of Monetary Base Changes

4. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-3 What Causes Changes in the Monetary Base?

5. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-4 What Causes the Monetary Base to Increase?

6. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-5 Assets a Central Bank Could Purchase to Increase the Monetary Base

7. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-6 Assets Purchased by Central Banks

8. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-7 Sources of Money Supply Changes

9. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-8 Effects of Different Reserve Requirements

10. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit M8-1 Effects of a $10 Million Withdrawal from a Bank with No Excess Reserves

11. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-9 Monetary Effects of Open Market Operations

12. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-10 Dominant Type of Open Market Operations and Securities that Central Banks Purchase Outright or Use for Repurchase Agreements: 2002 Source: Richard W. Kopcke, "The Practice of Banking in Other Industrialized Countries,’’ New England Economic Review, Second Quarter 2002, 6. Also available online at http://www.bos.frb.org/economic/neer/neer2002/neer202a.pdf (accessed September 11, 2006). *CG means central government.

13. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-11 Monetary Effects of Foreign Exchange Market Intervention

14. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-12 Monetary Effects of Discount Rate and Discount Loan Changes

15. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-13 Standing Facilities at the Central Banks of Major Industrial Nations: 2002 Source: Richard W. Kopcke, ‘‘The Practice of Banking in Other Industrialized Countries,’’ New England Economic Review, Second Quarter 2002, 6. Also available online at http://www.bos.frb.org/economic/ neer/neer2002/neer202a.pdf (accessed September 11, 2006). *MC means market ceiling. It is the rate the central bank charges on a fixed-term loan. MF means market floor. It is the deposit rate given on bank deposits at the central bank.

16. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-14 Stock Market Prices of Seven Blue Chip U.S. Companies, 1929 and 1932 Sources: AT&T Historic Stock Data, http://www.att.com/ir/ (accessed June 5, 2006); The Wall Street Journal, ‘‘New York Stock Exchange Transactions,’’ September 4, 1929, 32 (accessed through ProQuest, June 5, 2006); The Wall Street Journal, ‘‘New York Stock Exchange Transactions,’’ December 31, 1932, 32 (accessed through ProQuest, June 5, 2006).

17. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-15 Lags in Monetary Policy

18. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit 8-16 Major Monetary Tools of Central Banks and Their Effect on the Money Multiplier or Monetary Base

19. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-1 Major Accounts in a Central Bank Balance Sheet

20. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-2 Composition of Industrialized Nations’ Central Bank Assets: 2002 Source: Richard W. Kopcke, ‘‘The Practice of Banking in Other Industrialized Countries,’’ New England Economic Review, Second Quarter 2002, 7. Also available online at http://www.bos.frb.org/economic/ neer/neer2002/neer202a.pdf (accessed September 11, 2006).

21. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-3 How Paper Currency Enters the Economy

22. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-4 Cash Injections into the Economy Do Not Change the Monetary Base

23. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. U.S. Federal Reserve Note

24. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. U.S. Federal Reserve Note

25. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-5 Open Market Operations: Central Bank Purchases Securities from Banks

26. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-6 Open Market Operations: Central Bank and Individuals or Companies as Counterparties

27. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-7 Effects When ECB Buys Yen from European Banks

28. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-8 Effects When ECB Buys Yen from Japanese Banks

29. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-9 Effects When ECB Buys Yen from the Nonbank Public or from Governments

30. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-10 Effects of Discount Loans from the Central Bank

31. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-11 Structure of U.S. Banks and their Assets, June 30, 2005 Source: Federal Financial Institutions Examination Council, ‘‘Assets, Liabilities, and Net Worth of U.S. Commercial Banks, Thrift Institutions and Credit Unions as of June 30, 2005,’’ 2005 Annual Report, http://www.ffiec.gov/PDF/annrpt05.pdf, 21 (accessed September 11, 2006).

32. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-12 Structure of the Federal Reserve System

33. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-13 Map of the Federal Reserve Districts Source: Board of Governors of the Federal Reserve System, Washington, D.C., http://www.federalreserve.gov/otherfrb.htm (accessed September 11, 2006).

34. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-14 Central Bank Independence versus Inflation Source: Alberto Alesina and Lawrence H. Summers, ‘‘Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence,’’ Journal of Money, Credit and Banking 25, no. 2 (May 1993).

35. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-15 Central Bank Independence versus Inflation Volatility Source: Alberto Alesina and Lawrence H. Summers, ‘‘Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence,’’ Journal of Money, Credit and Banking, 25, no. 2 (May 1993).

36. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-16 Central Banks around the World

37. Copyright© 2008 South-Western, a part of Cengage Learning. All rights reserved. Exhibit A8-16 Continued