Econ 4.3

Friday, March 19, 1999

Announcements: Exam #3 has been rescheduled and will be held on Wednesday, April 7th instead of April 2nd as originally scheduled. Free tutoring at 220 Boucke (865-1841). Online Quizzes are up, however there is a problem with them. All homework assignments have been posted on the website. There will be no final exam scheduled during the final exam dates.

Lecture notes:  

Money Multiplier

• Mp = Potential Money Multiplier
• rr = Banks required reserve ratio
• Mp = 1 / rr
• R = Actual Bank Reserves
• DD = Checkable deposits
• R / rr = DD | Fully-loaned bank system

• Bond purchase charges
• Multiplier Calculation
• Mp = 1 / rr | eg. rr = 10%
• Mp = 1/ rr = 1 / .10 = 10
• Fully loaned banking system
• R / rr = DD | R = $200 million
• ($200 million / .10) = DD = $2,000 million

Influencing Banking Systems Reserves

• 1. Primary Deposits - increases reserves
  • 1. People deposit cash in banks -- net
  • 2. People sell government securities to US treasury or Fed through open market operations
  • 3. US treasury of Fed buys government securities through open-market operations
• 2. Primary Withdrawals -- decrease reserves
  • 1. People withdrawl cash from banks net
  • 2. People buy government securities from US treasury or Fed, through open - market operations
  • 3. US Treasury or Fed sells government securities through open-market operations.

Creation of Money: Multibank System Assumptions

1. Deposit #1 primary
2. Deposit #2 derivative
3. Banks desire to be "fully-loaned"
4. Bank reserve requirement is 25%
5. Loans are associated with additions to demand deposits, immediatly checked out and deposited in another bank