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Chapter 16 Determinants of the Money Supply. © 2004 Pearson Addison-Wesley. All rights reserved 16-2 Money Multiplier M = m  MB Deriving Money Multiplier.

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Presentation on theme: "Chapter 16 Determinants of the Money Supply. © 2004 Pearson Addison-Wesley. All rights reserved 16-2 Money Multiplier M = m  MB Deriving Money Multiplier."— Presentation transcript:

1 Chapter 16 Determinants of the Money Supply

2 © 2004 Pearson Addison-Wesley. All rights reserved 16-2 Money Multiplier M = m  MB Deriving Money Multiplier R = RR + ER RR = r  D R = (r  D) + ER Adding C 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 © 2004 Pearson Addison-Wesley. All rights reserved D =  MB r + e + c M = D + (c  D ) = (1 + c)  D 1 + c M =  MB r + e + c 1 + c m = r + e + c m < 1/r because no multiple expansion for currency and because as D  ER  Full Model M = m  (MB n + DL)

4 16-4 Excess Reserves Ratio Determinants of e 1.i , relative R e on ER  (opportunity cost  ), e  2.Expected deposit outflows, ER insurance worth more, e 

5 © 2004 Pearson Addison-Wesley. All rights reserved 16-5 Factors Determining Money Supply

6 © 2004 Pearson Addison-Wesley. All rights reserved 16-6 Money Supply

7 © 2004 Pearson Addison-Wesley. All rights reserved 16-7 Determinants of the Money Supply

8 © 2004 Pearson Addison-Wesley. All rights reserved 16-8 Deposits at Failed Banks: 1929–33

9 © 2004 Pearson Addison-Wesley. All rights reserved 16-9 e, c: 1929–33

10 © 2004 Pearson Addison-Wesley. All rights reserved Money Supply and Monetary Base: 1929–33


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