Central Banking

I. The Federal Reserve System –The Board of Governors –Advisory Councils Federal Advisory Council Consumer Advisory Council Thrift Institutions Advisory Council –The Federal Open Market Committee –The Federal Reserve Banks –Member Banks

II. Monetary Policy Instruments A. General Control Instruments Open Market Operations Discount Policy Change in Reserve Requirements Moral Suasion B. Selective Control Instruments

III. Credit Expansion Process A. Monetary Base Monetary base = (Federal Reserve notes in circulation) + (Treasury currency issued and held by public) + (Reserve balance outstanding) = (Currency in circulation) + (Reserve balance outstanding). MB = CH + AR.

AR = MB - CH.  AR =  MB -  CH.

B. Money Supply M1 = D + CH, where D = transactions deposits CH = cash holding.

–Cash Holding CH = c × D, where CH = cash holding, c = ratio of cash holding to deposits, and D = transaction deposits.  CH = c  D.

–M1 M1 = D + CH = D + c × D = (1 + c) D.  M1 = (1 + c)  D.

C. Deposit-Expansion Multiplier No Cash Drain – Reserves AR = RR = r D × D, where AR = actual reserves, RR = required reserves, r D = reserve requirement, and D = transactions deposits.

–Multiplier D = AR / r D = (1 / r D ) AR.  D = (1 / r D )  AR where  D = change in transactions deposits, 1 / r D = deposit-expansion multiplier, and  AR = change in actual reserves.

With Cash Drain – Reserves  AR =  MB -  CH.

–Multiplier  D = (1 / r D )  AR = (1 / r D ) (  MB -  CH). Since  CH = c  D,  D = (1 / r D ) (  MB -  CH) = [1 / (r D +c)]  MB. Let X D MB = 1 / (r D +c).  D = X D MB  MB.

 M1 = (1 + c)  D. Since  D = [1 / (r D +c)]  MB,  M1 = [(1 + c) / (r D +c)]  MB. Let X M1 MB = (1 + c) / (r D +c).  M1 = X M1 MB  MB