How is the banking system like a magnifying glass? BERNANKE
Let’s assume that banks are “fully loaned up” and that we know the magnitudes of C, R, and r. C = 100 R = 100 r = 0. 2 M = C + R/r M = 100 + 100/0. 2 M = 100 + 500 = 600
Sometimes people choose to deposit more of their money in banks…. BERNANKE
M = C + R/r 50 150 M = 100 + 100/0. 2 50 750 800 M = 100 + 500 = 600
Sometimes people withdraw their money from banks…. BERNANKE
M = C + R/r 150 50 M = 100 + 100/0. 2 150 250 400 M = 100 + 500 = 600
Sometimes the Board of Governors decreases the required reserve ratio…. BERNANKE
M = C + R/r 0. 1333 M = 100 + 100/0. 2 750 850 M = 100 + 500 = 600
Sometimes the Board of Governors decreases the discount rate…. BERNANKE
M = C + R/r 150 M = 100 + 100/0. 2 750 850 M = 100 + 500 = 600
Sometimes the FOMC decides to buy more Treasury bills…. BERNANKE
M = C + R/r 150 M = 100 + 100/0. 2 750 850 M = 100 + 500 = 600
In late 1999, a lot of people were worried about Y 2 K because…. BERNANKE
We know that M = C + D. Let’s define the monetary base (B) as B=C+R We know that R = r. D. Let’s recognize that people make their own choices about the preferred ratio of currency to checkingaccount money. That is, k = C/D. We can write C = k. D, where k is the preferred proportion. So, M = C + D = k. D + D = (k + 1)D And B = C + R = k. D + r. D = (k + r)D
So, M = C + D = k. D + D = (k + 1)D And B = C + R = k. D + r. D = (k + r)D
So, M = C + D = k. D + D = (k + 1)D And B = C + R = k. D + r. D = (k + r)D M B = M= (k + 1)D (k + r)D (k + 1) B (k + r) = (k + 1) (k + r)
Suppose we know: C = 500 and R = 100, k = 0. 80 and r = 0. 10. Can you calculate M? B=C+R B = 500 + 100 B = 600 M = [(k + 1)/(k + r)] B M = [(0. 80 + 1)/(0. 80 + 0. 10](600) M = [1. 80/0. 90](600) M = 2(600) M = 1200 M= (k + 1) B (k + r)
C = 500; R = 200 r = 0. 10; k = 0. 25 M= (k + 1) B (k + r) Calculate M---using the equation M = C + R/r = 500 + 200/0. 10 = 500 + 2000 = 2, 500 Calculate M again, this time taking “k” into account. M = (k + 1)/(k + r) [C + R] M = (0. 25 + 1)/(0. 25 + 0. 10)[500 + 200] M = 1. 25/0. 35 [700] = 25/7 [700] = 2, 500
C = 500; R = 200 r = 0. 10; k = 0. 25 M= (k + 1) B (k + r) Let the Fed add 70 worth of reserves. Calculate M---using the equation M = C + R/r = 500 + 270/0. 10 = 500 + 2700 = 3, 200 Calculate M again, this time taking “k” into account. M = (k + 1)/(k + r) [C + R] M = (0. 25 + 1)/(0. 25 + 0. 10)[500 + 270] M = 1. 25/0. 35 [700] = 25/7 [770] = 2, 750
C = 500; R = 200 r = 0. 10; k = 0. 25 M= (k + 1) B (k + r) Let the Fed adds 70 worth of reserves. Explain the difference in results by calculating C & R. M = C + R/r = 500 + 270/0. 10 = 500 + 2, 700 = 3, 200 C = 500; R = 270 D = 2, 700 Note, however, that k = C/D = 500/2, 700 = 0. 185
C = 500; R = 200 r = 0. 10; k = 0. 25 M= (k + 1) B (k + r) Let the Fed adds 70 worth of reserves. Explain the difference in results by calculating C & R. M = (k + 1)/(k + r) [C + R] M = (0. 25 + 1)/(0. 25 + 0. 10)[500 + 270] M = 1. 25/0. 35 [700] = 25/7 [770] = 2, 750 M = C + D = k. D + D = (k + 1)D D = M/(1 + k) = 2, 750/(1 + 0. 25) = 2, 750/1. 25 = 2, 200 R = r. D = 0. 10(2, 200) = 220 C = B – R = 770 – 220 = 550 k = C/D = 550/2, 200 = 0. 25
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