1. CHAPTER 15 “MONEY SUPPLY PROCESS”
The Economics of Money, Banking, and Financial Markets: 10E, Frederic S. Nishkin
Group One Members & Roll #- -
Htoo Mg2 Latt / 8
Chaw Su Aung Win / 5
Kyauk Kay Khine / 12
Ohnmar Aye / 35
Toe Thiri Tun / 48
Nan El Khaung / 26
Chan Htut /4
Group One
MBF- Batch 1
Master of Banking and Finance Programme, Yangon, Myanmar.
9th Nov 2013
MBF1;4th Smt; G1 Presentation: Economics of Money, Banking, & Financial Markets

2. OBJECTIVES OF STUDY How money supply process is determined?
How the Banking System Create Deposit?
Who control money supply?
What cause it to change?
How might control of it be improved?
Group One

3. Three Players in the money supply process
Depositors
Banks
The central bank

4. Three Players in the money supply process
The Central Bank – The government agent that oversees the banking system. Responsible for the conduct of monetary policy.
In Myanmar called Central Bank
In US called Federal Reserve System
The central bank

5. Three Players in the Money Supply Process
Banks
Banks – (Depository Institutions) The financial intermediaries that accept deposits from individuals and institutions. Make Loans- Commercial Banks, Savings and loan associations, mutual savings banks and credit unions.

6. Three Players in the money supply process
Depositors- Individuals and institutions that hold deposits in the banks
Depositors
The three player in the money supply process:
The Central Bank (or) Federal Reserve System
is most important player.
conducts monetary policy involves actions that affect the balance sheet

7. Federal Reserve System
Balance Sheet
Federal Reserve System
Assets
Government Securities
Loans to Financial Institutions
Liabilities
Currency in Circulation
Reserves

8. Federal Reserve System
Balance Sheet
Federal Reserve System
Government Securities
The Fed’s holdings of securities issued by U.S Treasury
Loans to Financial Institutions
Fed provide reserves to the banking system is by making loans to banks and other financial institutions.

9. Federal Reserve System
Balance Sheet
Federal Reserve System
Currency in circulation
is the amount of currency in the hands of the public
Reserves
Fed hold deposits from all bank with their accounts.
Reserves consist of deposits at the fed + physically stored in the bank vaults.
Fed provides reserves to banking system at rate called the discount rate.

10. More on Reserves
• Fed requires banks to hold a fraction (10%) of deposits as reserves.
   - It is called Required Reserve Ratio
IN MYANMAR
Central Bank of Myanmar requires commercial banks to hold 10% of Deposits as reserves and 50% of 10% reserves has to place at Central Bank as reserves.
Additional holding of cash are called excess reserves.
Total reserves = Required Reserves + Excess Reserves

11. TOTAL RESERVE
Excess Reserve
50% of the 10% Reserve
10% of Deposit
Note: Fed does not pay interest on liabilities, but collects interest on its assets. It means that Fed gives Bonds to commercial banks for their placing of reserve.
Earnings (in billions) go to federal government and pay for the operation of the Fed.

12. Control of Monetary Base
MB (high-powered money) = Currency in circulation + Reserves
Open Market Operations
• Fed exercises control over monetary base through
Purchases or sales of government securities in open market
(ii) Extension of discount loans to banks
• A purchase of bonds by the Fed is called an open market purchase
• A sale of bonds by the Fed is called an open market sale MB C R

13. Control of the Monetary Base
Open Market Purchase of $100 of bonds from Bank with a $100 check
The Banking System
Assets
Liabilities
Securities $100
Reserve $100
Federal Reserve System
Assets
Liabilities
Securities $100
Reserve $100

14. Control of the Monetary Base
Open Market Purchase of $100 of bonds from person or corporation who deposits the Fed’s check in a local bank
Nonbank Public
Assets
Liabilities
Securities $100
Checkable Deposits +$100
Banking System
Assets
Liabilities
Reserves $100
Checkable Deposits + $100
Fed Reserve System
Assets
Liabilities
Securities $100
Reserve $100

15. The result of the Fed’s Open Market Purchase
Result: Reserves increase by the amount $ 100
The Monetary Base increase by the same amount $ 100 MB C R

16. If the seller receive currency for the check
Nonbank Public
Assets
Liabilities
Securities $100
Currency in C $100
Fed Reserve System
Assets
Liabilities
Securities $100
Current in circulation $100

17. The result of the Fed’s Open Market Purchase
Reserves unchanged
The currency in circulation increase by the amount $ 100
Thus, The Monetary Base increase by the same amount $ 100
Conclusion: Effect on MB of OMP is certain and effect on Reserves depends on whether seller of bond keeps proceeds in currency or deposits.
Note:
At local bank vault cash falls by $100, deposits at Fed increase by same amount.
I.e., the transaction is simply a switch from one type of reserves to another.

18. Open Market Sale Nonbank Public Fed Reserve System
Open Market Sale of $100 of bonds from person who pays cash
Nonbank Public
Assets
Liabilities
Securities $100
Currency in C $100
Fed Reserve System
Assets
Liabilities
Securities $100
Currency in circulation -$100

19. The result of the Fed’s Open Market Sale
Reserves unchanged
The currency in circulation decrease by the amount $ 100
Thus, The Monetary Base decrease by the same amount $ 100
If instead, person uses a check written on a local bank reserves fall by $100.
Conclusion: Effect on MB of OMS is certain, effect on Reserves depends on whether buyer of bond uses currency or checkable deposits.

20. Overall Conclusion
The effect of open market operations on the monetary base is much more certain than the effect on reserve.
Fed can control MB using Open Market Operations more effectively than it can control reserves.

21. Affecting reserves without changing MB
Shifts From Deposits into Currency(Jane Brown permanently withdraws
$100 from her checking account.)
Nonbank Public
Assets
Liabilities
Checkable Deposits -$100
Currency in C $100
Fed Reserve System
Assets
Liabilities
Currency in circulation +$100
Reserves $100
Banking System
Assets
Liabilities
Reserves $100
Checkable Deposits -$100
Result: R ↓ $100, MB unchanged

22. Discount Loans Banking System Fed Reserve System
Also affect MB, Suppose Fed makes $100 loan to First National Bank
Banking System
Assets
Liabilities
Reserves $100
Discount Loans $100
Fed Reserve System
Assets
Liabilities
Discount Loans $100
Reserve $100
Result: R increase , MB increase
Reverse happens when bank pays of a discount loan (I.e., all of the +’s become –’s).

23. Factors outside Fed’s control
• Certain factors affect the MB that are outside the control of the Fed
1. Float - results from check clearing process that occurs at the Fed
* first increase reserves of depositing bank
* second (later) decrease the reserves of bank on which check is drawn
* result is temporary increase in MB
2. Treasury deposits at Fed
* whenever Treasury moves deposits from commercial banks to Fed the result is a decrease in MB

24. Deposit Creation: Single Bank
First National Bank
Assets
Liabilities
Securities $100
Reserves $100
First National Bank
Assets
Liabilities
Securities $100
Deposit $100
Reserves $100
Loans $100
First National Bank
Assets
Liabilities
Securities $100
Deposit $100
Loans $100
MBF1;4th Smt; G1 Presentation: Economics of Money, Banking, & Financial Markets

25. Deposit Creation: Banking System
Bank A
Assets
Liabilities
Reserves $100
Deposits $100
Bank A
Assets
Liabilities
Reserves $10
Deposits $100
Loans $90
Assets
Bank B
Liabilities
Reserves $90
Deposits $90
Assets
Bank B
Liabilities
Reserves $9
Deposits $90
Loans $81
MBF1;4th Smt; G1 Presentation: Economics of Money, Banking, & Financial Markets

26. Deposit Creation

27. Deposit Creation 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

28. Deposit Multiplier Simple Deposit Multiplier ΔD = 1 / rr x ΔR
Deriving the formula
R = RR = r × D
D = × R rr
ΔD = × ΔR

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

30. 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
Tells us amount of MB needed support D, ER and C
2. Increase in C or ER is not multiplied
MB = (r × D) + (e × D) + (c ×D)
= (r + e + c) × D

31. D = × MB
r + e + c
M = D + (c × D ) = (1 + c) × D
M = 1 + c × MB
m = c
m < 1/r because no multiple expansion for currency and because
as D ↑ ER ↑
(I.e., m is much less than 10 from simple model)
↑ r or ↑ c or ↑ e results in ↓ m and M.

32. Excess Reserves Ratio, e

33. Factors Determining Money Supply

34. Money Supply

35. Determinants
of the Money Supply

36. Deposits at Failed Banks: 1929–33

37. e, c: 1929–33

38. Money Supply and Monetary Base: 1929–33

39. Thank You
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