Chapter 14: Determinants of the Money Supply

The money supply model and the money multiplier
1. fed can control monetary base better than reserves: money supply = money multiplier X monetary base
2. desired level of currency and excess reserves grow proportionally with checkable deposits
-currency ratio = currency/deposit
-excess reserves ratio = excess reserves/deposits
-total reserves = required reserves + excess reserves
-required reserves = required reserve ratio X deposits
-R=(rXD) + ER
-MB = R + C = (rXD) + ER + C ; the amount of monetary base needed to support the existing amounts of checkable deposits, currency, and excess reserves
-an increase in the monetary base that goes into currency is not multiplied, whereas an increase that goes into supporting deposits is multiplied
-MB = (r X D) + (e X D) + (c X D) = (r + e + c) X D ; D = [1/(r + e +c) ] X MB
-M = [(1+c)/(r+c+e)] X MB ; currency ratio set by depositors, excess reserves ratio set by banks, and required reserve ratio set by Fed
-money multiplier is less than teh simple deposit multiplier; although there is multiple expansion deposits, there is no such expansion for currency

Factors that determine the money multiplier
1. the money multiplier and money supply are negatively related to the required reserve ratio
2. the money multiplier and money supply are negatively related to the currency ratio
3. negatively related to the excess reserves ratio
4. banking system's excess reserves ratio is negatively related to the market interest rate; as market interest rate increases, the expected return on loans and securities rises relative to the zero return on excess reserves and the excess reserves ratio falls
5. excess reserves ratio is positively related to expectedd deposit outflows

Additional factors that determine money supply
1. monetary base into two components: one that the Fed can control and one that it can't
-less tightly controlled is the amount of the base that is created by discount loans (borrowed reserves)
- the tightly controlled is the nonborrowed monetary base which results from open market operations
-(nonborrowed monetary base) = (monetary base) + (borrowed reserves from the Fed
-M = m X (MBn + BR)
-money supply is positively related to the nonborrowed monetary base
-money supply is positively related to the level of borrowed reserves fromt eh fed

Application: movements in money supply
1. over long periods, the primary determinant of movements in the money supply is the nonborrowed monetary base which controlled by fed open market operations

Application: bank panics
1. cause substantial reduction in the money supply by increasing in c and e.