1. chapter 16 Determinants of the Money Supply

2. Copyright © 2001 Addison Wesley Longman TM 16- 2 Money Multiplier M = m  MB Deriving Money Multiplier R = RR + ER RR = r D  D R = (r D  D) + ER Adding C to both sides R + C = MB = (r D  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  D) +({ER/D}  D )+ ({C/D}  D) = (r D + {ER/D} + {C/D})  D

3. Copyright © 2001 Addison Wesley Longman TM 16- 3 1 D =  MB r D + {ER/D} + {C/D} M = D + ({C/D}  D ) = (1 + {C/D})  D 1 + {C/D} M =  MB r D + {ER/D} + {C/D} 1 + {C/D} m = r D + {ER/D} + {C/D} m < 1/r D because no multiple expansion for currency and because as D  ER  Full Model M = m  (MB n + DL)

4. Copyright © 2001 Addison Wesley Longman TM 16- 4 Excess Reserves Ratio Determinants of {ER/D} 1.i , relative RET e on ER  (opportunity cost  ), {ER/D}  2.Expected deposit outflows, ER insurance worth more, {ER/D} 

5. Copyright © 2001 Addison Wesley Longman TM 16- 5 Determinants of DL 1.i , i – i d , DL  2.i d , i – i d , DL  Discount Loans and Interest Spread

6. Copyright © 2001 Addison Wesley Longman TM 16- 6 Factors Determining Money Supply

7. Copyright © 2001 Addison Wesley Longman TM 16- 7 Money Supply

8. Copyright © 2001 Addison Wesley Longman TM 16- 8 Determinants of the Money Supply

9. Copyright © 2001 Addison Wesley Longman TM 16- 9 Deposits at Failed Banks: 1929–33

10. Copyright © 2001 Addison Wesley Longman TM 16- 10 {ER/D}, {C/D}: 1929–33

11. Copyright © 2001 Addison Wesley Longman TM 16- 11 Money Supply and Monetary Base: 1929–33

12. Copyright © 2001 Addison Wesley Longman TM 16- 12 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 r D + {ER/D} + {C/D} 1+{C/D}+{T/D}+{MMF/D} m 2 = r D + {ER/D} + {C/D}

13. Copyright © 2001 Addison Wesley Longman TM 16- 13 Factors Determining M2