1. rr = reserve requirement = 0.10
RR = required reserves, ER = excess reserves
Wells Fargo
Citibank
Chase A
L + SE A
L + SE A
L + SE 1
Res +$1,000
Dep +$1,000 1 3
Res +$900
Dep +$900 2 5
Res +$810
Dep +$810 4
RR +$100
RR +$90
RR +$81
ER +$900
ER +$810
ER +$729
Loans +$900 2 4
Loans +$810
Loans +$729
Res -$900 5
Res -$810 3
ER -$900
ER -$810
$1,000
$900
$810

2. Simple deposit multiplier
d = simple deposit multiplier = 1 𝑟𝑟
Ex. – d = 1 / 0.10 = 10
∆ MS = ∆ money supply = multiplier * ∆ reserves
Ex. - ∆ MS = 10 * $1,000 = $10,000

3. People hold some assets in cash instead of deposits
c. Money multiplier
People hold some assets in cash instead of deposits
c = currency deposit / ratio = portion of assets held in cash
Banks may not make maximum possible loans
e = excess reserve ratio = reserves held on top of required reserves
mm = money multiplier = 1 + 𝑐 𝑐+𝑟𝑟+𝑒
Ex. – c = 0.10, e = 0.05 =>
mm = ( ) / ( ) = 4.4
∆ MS = 4.4 * $1,000 = $4,400

4. FRB NY Wells Fargo Citibank Chase ∆ MS = 10 * +$100 M = +$1 B
L + SE A
L + SE A
L + SE A
L + SE 1
Secs +$100 M
Res (Wells) +$100 M 1
Secs -$100 M 4
Res +$100 M
Dep +$100 M
Res +$90 M
Dep +$90 M 3 6 5 2 2
Res +$100 M
RR +$10 M
RR +$9 M 4
-$100 M
RR +$0 M
ER +$90 M
ER +$81 M
Res (Citi) +$100 M 4
ER +$100 M 5
Loans +$90 M
Loans +$81 M 3
Loans +$100 M 6
-$90 M 6
Res -$90 M
Res (Chase) +$90 M 4
Res -$100 M
ER -$90 M 6
ER -$100 M
∆ MS = 10 * +$100 M = +$1 B
$100 M
$90 M
∆ MS = 4.4 * +$100 M = +$440 M

5. FRB NY Wells Fargo Citibank Chase ∆ MS = 10 * -$100 M = -$1 B
L + SE A
L + SE A
L + SE A
L + SE 1
Secs -$100 M
Res (Wells)
-$100 M 1
Secs +$100 M 4
Res -$100 M
Dep -$100 M
Res -$90 M
Dep -$90 M 3 6 5 2 2
Res -$100 M
RR -$10 M
RR -$9 M 4
+$100 M
RR +$0 M
ER -$90 M
ER -$81 M
Res (Citi)
-$100 M 4
ER -$100 M 5
Loans -$90 M
Loans -$81 M 3
Loans -$100 M 6
+$90 M 6
Res +$90 M
Res (Chase)
-$90 M 4
Res +$100 M
ER +$90 M 6
ER +$100 M
∆ MS = 10 * -$100 M = -$1 B
$100 M
$90 M
∆ MS = 4.4 * -$100 M = -$440 M

6. (c ) Securities’ prices and interest rates
Ex. Coupon = 50
Price = 1000 => Rate = = 5%
Price = 800 => Rate = = 6.25%
Price = 1250 => Rate = = 4%
Buy securities => price of securities increases => interest rate decreases
Sell securities => price of securities decreases => interest rate increases

7. 4. Money market

8. a. Supply of money Look at real money supply RLMS1 RLMS2 r
RLMS = MS / P
RLMS = f (r, MS, P)
(0)
(+)
(-)
MS or P => RLMS
M/P

9. b. Demand for money Holding money means interest not earned
More transactions as income increases => more money needed r
RLMD = MD / P = f(r, Y)
(-)
(+)
Y => RLMD
RLMD1
RLMD2
M/P

10. c. Equilibrium r
RLMS r*
RLMD
(M/P)*
M/P

11. d. Changes (1) Changes in money supply r RLMS2 RLMS0 RLMS1
RLMD
M/P

12. d. Changes (2) Changes in money demand r RLMS
Y => RLMD0 -> RLMD1 r1
=> r r0
Y => RLMD0 -> RLMD2
=> r r2
RLMD1
RLMS2
RLMD0
M/P