Chapter 14 Flashcards
Fed’s balance sheet
Assets: Securities and loans to institutions
Liabilities: currency in circulation and reserves
3 players in the money supply process
central bank (fed), banks, depositors
What is the monetary base made of
Fed’s monetary liabilities + U.S. Treasury Liabilities (coins, <10%)
Monetary base
high powered money
total amount of currency that is circulated by public or in commercial bank deposits held in central bank reserves
MB formula
MB = Currency (C) + total reserves (R)
How does Fed impact MB?
OMO (primary) and discount loans
Other factors impacting Monetary Base
Float - increase in Fed’s reserves due to clearing check
treasury deposits at Federal Reserve
interventions from foreign exchange market
** these are random and out of feds control**
Split monetary base formula
Non-borrowed MB (MBn) = MB - Borrowed Reserves (BR)
assumption if banks don’t hold excess reserves and use all of them
Required Reserves (RR) = Total Reserves (R)
Total Reserves formula
R = rr * checkable deposits (D)
simple deposit multiplier
1/rr
change in checkable deposits formula
ΔD = (1/rr) * ΔR
3 critiques of simple model
- holding cash stops the process
- banks may not use all excess reserves to buy securities or make loans
- depositors and banks decisions about how much currency/excess reserves to hold cause money supply to change
5 factors that determine money supply
- changes in non-borrowed monetary base
- changes in borrowed reserves from fed
- changes in rr
- changes in currency holdings
- changes in excess reserves
how does change in MBn impact money supply?
increase; increase
more MB for deposit creation
how does change in rr impact money supply?
increase; decrease
less multiple deposit expansion
how does change in BR impact money supply?
increase; increase
more MB for deposit creation
how does change in excess reserves impact money supply?
increase; decrease
less loans and deposit creation
how does change in currency holdings impact money supply?
increase; decrease
less multiple deposit expansion
Money supply formula
M = money multiplier * MB
MB formula
MB = C + R
money multiplier formula
m = (1+c) / (rr+e+c)
currency ratio formula
c = C/D
Excess reserve ratio
e = ER/D
Why didn’t quantitative easing after 2007 increase money supply, although MB increased by 350%?
because excess reserves rose dramatically
