Determinants of the Money Supply chapter 16 Determinants of the Money Supply

Money Multiplier M = m  MB Deriving Money Multiplier R = RR + ER RR = rD  D R = (rD  D) + ER Adding C to both sides R + C = MB = (rD  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 = (rDD) +({ER/D}D )+ ({C/D}D) = (rD + {ER/D} + {C/D})  D

1 D =  MB rD + {ER/D} + {C/D} M = D + ({C/D} D ) = (1 + {C/D}) D 1 + {C/D} M =  MB m = m < 1/rD because no multiple expansion for currency and because as D  ER  Full Model M = m  (MBn + DL)

Excess Reserves Ratio Determinants of {ER/D} 1. i , relative RETe on ER  (opportunity cost ), {ER/D}  2. Expected deposit outflows, ER insurance worth more, {ER/D} 

Discount Loans and Interest Spread Determinants of DL 1. i , i – id , DL  2. id , i – id , DL 

Factors Determining Money Supply

Money Supply

Determinants of the Money Supply

Deposits at Failed Banks: 1929–33

{ER/D}, {C/D}: 1929–33

Money Supply and Monetary Base: 1929–33

M2 Money Multiplier M2 = D + ({C/D}D) + ({T/D}D) + ({MMF/D}D) = (1+{C/D}+{T/D}+{MMF/D})  D 1+{C/D}+{T/D}+{MMF/D} M2 =  MB rD + {ER/D} + {C/D} m2 =

Factors Determining M2