Bank Expansion Flashcards
Define the money multiplier
The ratio of the money supply to monetary base
At what levels of c and f is the money supply at equilibrium?
When C is at its desired level (c x D), and R is also at its desired level (f x D). Therefore, in equilibrium, k= (c+1)/(c+f)
What is c’s possible range of values?
From 0 to infinity, since c=C/D. If D approaches 0, c approaches infinity although this is a highly unlikely scenario.
Factors affecting the money multiplier?
If the reserve ratio increases, then the money supply decreases.
If c increases, then k decreases (which makes intuitive sense since c appears in both the numerator and denominator but increases at a much greater rate in the latter).
State the money multiplier equation that takes into account changes in excess reserves
f= fr + fx, where fx is the bank’s desired level of excess reserves, fr the bank’s mandated level of reserves in relation to the level of deposits.
Therefore, k = (1+c)/(c+fx+fr)
Reserve requirements as of 1/22/15?
0% for banks with deposits worth 0-14.5M
3% for banks with 14.5M-103.6M
10% for banks with 103.6M and up.
No reserve requirements imposed on savings and timed deposits
In practice, the average reserve requirement is only 7% on all banks. In recent years, however, thanks to sweep accounts, the actual reserve requirement has fallen to 3% (R/D+S = 0.03)
When were reserve requirements on savings and timed deposits abolished?
Eliminated in 12/90, these types of deposits are, however, technically can be withdrawn on demand despite their limited checking privileges.
How are the reserve requirement brackets adjusted to prevent bracket creep?
Indexed to increase by 80% of the total increase in reserve liabilities
Why do banks tend to keep excess reserves nowadays?
Prior to 10/08, reserves accrued no interest. However, after 08, the Fed started to pay interest on reserves at a rate resembling the federal funds rate (around the 3-month treasury notes yield)
Historical trend of C/D?
Tended to remain steady until 1995, when the currency to deposit ratio increased substantially as currency holdings increased while deposits remained constant.
How do sweep accounts work?
Software averages your checking balances by analysing the 6 times you withdrew money from your money market deposit account, and then sweeping any excess balances from your checking account into your MMDA. Beneficial for banks as the sweep accounts show up as M2 and are not subject to any reserve requirements.
Historical range of the non sweeps adjusted multiplier?
Used to be 2.5-3, then tanked after a drastic increase in demand for currency
Describe the trend of the sweep adjusted currency ratio (C/D+S)
Upward but continuation of previous trend (increases in C balanced by increases in D + S)
Explain the causes of the uptrend in the non sweep adjusted c (caused by an increase in demand for currency) from 1959-95.
Uptrend in the level of illegal activity (which deals in cash)
Foreign use of currency in high inflation countries increasing
State the trend differences between the non sweep adjusted c and sweep adjusted c.
While C/D has increased incrementally from 1995 onwards due to higher demand for currency holdings, the sweep adjusted C/D+S has increased at a lower rate due to the offsetting increase in D+S (on the increase in C).
