Chapter 14: The Money Supply Process Flashcards
Monetary base
the Feds balance sheet
money supply process
the mechanism that determines the level of money supply
three players in the money supply process
- central banks
- banks
- depositors
central bank
the government agency that oversees the banking system and is responsible for the conduct of monetary policy
monetary liabilities of the Fed
currency in circulation and reserves
currency in circulation
the amount of currency in the hands of the public
reserves
deposits at the Fed plus currency that is physically held by banks
assets on the Fed’s balance sheet
securities and loans to financial institutions
Why are the Fed’s liabilities important?
increases in either or both currency in circulation and reserves lead to an increase in money supply
Why are the Fed’s assets important?
lead to changes in reserves and the monetary base which affect the monetary base; also earn higher interest rates than liabilities
Equation for monetary base
MB = C (currency in circulation) + R (total reserves) = Fed’s monetary liabilities + Treasury’s monetary liabilities = MB_N + BR
open market operations
the Fed’s purchases or sales of securities in the open market
open market purchase
a purchase of bonds by the Fed
- increases MB
open market sales
a sale of bonds by the Fed
- decreases MB
primary dealers
government securities dealers who operate out of private banking institutions
Items that affect the monetary base, but are not controlled by the Fed
- float
- Treasury deposits at the Fed
float
the temporary net increase in the total amount of reserves in the banking system caused by the Fed’s check clearing process
Treasury deposits at the Fed
Monetary base can decrease when the Treasury moves deposits from commercial banks to the Fed
- increases Treasury deposits at the Fed
- causes a deposit outflow at the banks and causes reserves to fall
what is the nonborrowed monetary base?
less tightly controlled component that is created by loans from the Fed
equations for nonborrowed monetary base
MB_n = MB - BR(borrowed reserves from the Fed)
Can the Fed still control MB with float and Treasury deposits?
Yes, float and Treasury deposits have short run fluctuations and are predictable
multiple deposit creation
When the Fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount
simple deposit multiplier
the multiple increase in deposits generated from an increase in the banking system’s reserves
formula for the multiple expansion of deposits
changeD = 1/rr x changeR
Changes in the nonborrowed monetary base
the money supply is positively related to the nonborrowed monetary base
- Fed
- less multiple deposit expansion
Changes in borrowed reserves from the Fed
the money supply is positively related to the level of borrowed reserves from the Fed
- banks
- more MB for deposit creation
Changes in excess reserves
the money supply is negatively related to the amount of excess reserves
- banks
- less loans and deposit creation
Changes in currency holdings
Hold excess reserves constant, the money supply is negatively related to currency holdings
- depositors
- less multiple deposit expansion
Change in required reserve ratio
money supply is positively related to the required reserve ratio
- Fed
- more MB for deposit creation
money multiplier
tells us how much the money supply changes for the given change in MB
equation for money supply
MS = m x MB = C + D
currency ratio
C/D
excess reserve ratio
ER/D
equation for money multiplier
m = (1 + c)/(rr +er + c)
Does currency undergo multiple expansion?
No
Do deposits undergo multiple expansion?
Yes
What happens to excess reserves when MB and deposits increase?
Excess reserves increase
simple money multiplier
m = 1/rr
- no currency holding
- no excess reserves
monetary liabilities of the Treasury
Treasury currency in circulation and coins
