not mit

'

e %
Viet i down trong
tinh
phes
: Cac bai lien den
quan
nhu
Tk trinh
bay co ②
, dung
(tri thi de bai
↑ account
-

ya)

Money Supply process

MS
=i M

able
=

(Myl transaction
7
out
currency
I
money multiplies
Liability of Central B
z -
Participants Monetary base
RT$100
E MBT$100

I
>Central bank
T

>OMO .

bank (1)
-

Eg : OMO
purchase $100 I public
>Commercial bank Fed &
(non-banks)
(2)
Fed cash the check dercosis
(receive in
cash) (deposit money
Deposites (non bank public T-Sec + 100 R + 100
inito
bank)
-> -
+
->
$100

(gor ,
individual ,
corp) (1):
=> So

=> MBT $100

Bank

Central bank R + 100 CD + 100

Reserves (R)
T-Security +
↑ Sec -100
Fed
Discount Loans
Currency
circulation
(C) T-Sea + 100
Currency 100

in
<publie)
<2) Depositors - R

[ Sec
-
-100
&
Bank (no effect)
Depositers (now bank public) Currency + 100
R

Currency Borrowings T-Sec

Deposit
<3) Depositors Fed

Bank ↑ Sec -100 ↑ Sec + 100 R + 100

Reserve Checkable deposits mostliquidkabila

ly C C

T-Sec Bank capital Deposit + 100

Loans others
Borrowing from
CB
,

Bank

R + 10017 100
+

T-Sec
 &
Discount
Lending (Moneytary ban)
Eg Feel lend banks $1m--Mis by the loans
of
-
: nice

Fed Bank

Discount Loans $1m R + $1m R + Im D loans

.
Im
(borrow from 21

Money multiplier

S·
m =
+e CD : level
of deposity

A var -> Am

at -> my

rT ->
my

eT -
mt

10
-
r =

· Simple multiple deposit creation ->

c = 0

↑e = 0

AD =
ARX or : reserve
requirement ratio * D =

10 xt = $1, 00

Case 2: new creation

money
no

just keep it as
currency

-> final BS this bank

of
example : OM
purchase $100 from the bank
-> TR RR (no ER)
=
CB comes
from received)
Bank/
S
+ Bank A Bank B
12) (1)

excess =
of R + 100 Loans + 100 R + 100D + 100

-
-

↑ Sec -
100
=>
T_Sea -100
↳ RR = 10

Loans + 100 ER = 90
Clend out
money)
(lend out
of ER]
Bank B all Bank (

-> R + 10D + 100 R + 97 + 90

=>
Loan + 98
Loan + 81
 TUTORIAL 11
THE MONEY SUPPLY PROCESS

I. Review questions
1. What are the main items in the central bank balance sheet?
2. How does the central bank control the monetary base and money supply?
3. Describe the multiple deposit creation process?
4. What factors influence the money supply?

II. Multiple-choice questions

1. The largest source of Federal Reserve System income is:
A. Fees charged to member banks.
B. Interest and capital gains on government securities.
C. Discount loans.
D. Interest on loans to businesses.

2. When the Fed sells governments securities to a private firm or individual who
pays for them with a check
A. Currency in circulation decreases.
B. The money supply increases.
C. Bank reserves increase.
D. Bank reserves decrease.

3. The monetary base (or high-powered money) equals to:

A. Federal Reserve float.
B. Fed security holdings + discount loans.
C. reserves + outstanding Federal Reserve notes.
D. reserves + currency in circulation.

4. An open market purchase of securities by the Fed from banks will:

A. increase bank security holdings.
B. increase bank loans.
C. increase bank reserves.
D. increase the public's currency holdings.

5. An open market purchase of securities by the Fed from the public will:
 A. always increase the monetary base.
B. always increase bank reserves.
C. always increase the public's currency holdings.
D. always increase bank loans.

6. If a bank borrows from the Fed at the discount window, then:

A. bank reserves increase.
B. bank loans will increase.
C. Federal Reserve notes outstanding will increase.
D. currency holdings by the public will increase.

7. Bank A faces a 15% reserve requirement ratio. If this bank gains $100 of
deposits and $100 of new reserves, then this bank has:
A. $85 of new required reserves.
B. $15 of excess reserves.
C. $15 of new loans.
D. $15 of new required reserves

8. As banks make new loans, they will:

A. increase reserves.
B. increase discount loans.
C. lose reserves.
D. increase security holdings.

9. If banks have a 20% reserve requirement ratio, then for the banking system an
addition of $100 of new reserves will create:
A. $500 of new reserves.
B. $500 of new excess reserves.
C. $500 of new deposits.
D. $500 of security holdings on the Fed's balance sheet.

10. The formula for the simple deposit multiplier can be expressed as
A) △R = r × △D
B) △D = 1/r × △R
C) △r = 1/R × △R
D) △R = 1/r × △D

11. Which of the following is not a player in the money supply process?
A. The central bank
B. Borrowers
C. Depository institutions
D. Congressional banking committees

12. On the Federal Reserve System's balance sheet, float is:

A. themonetary base minus high-powered money.
B. cash items in process of collection minus deferred-availability cash items.
 C. total reserves minus excess reserves.
D. Federal Reserve assets minus Federal Reserve liabilities.

13. Which of the following is an assumption of the simple model of multiple

deposit creation?
A. Depositors hold no currency.
B. Banks do not lend all their excess reserves.
C. Open market sales increase bank reserves.
D. The required reserve ratio is zero.

14. If bank depositors begin to withdraw more currency from banks,

A. The monetary base is unchanged.
B. The monetary base decreases.
C. Bank reserves increase.
D. Bank reserves are unchanged.

15. The maximum amount a bank can lend is

A. The amount it has on deposit with the Fed.
B. The amount of its total reserves.
C. 90 percent of its deposits.
D. The amount of its excess reserves.

III. Practice exercises

Questions taken and adapted from chapter 15 (Mishkin, 2019)

1. Classify each of these transactions as an asset, a liability, or neither for each of the
“players” in the money supply process—the Federal Reserve, banks, and depositors.
a. You get a $10,000 loan from the bank to buy an automobile.
b. You deposit $400 into your checking account at the local bank.
c. The Fed provides an emergency loan to a bank for $1,000,000.
d. A bank borrows $500,000 in overnight loans from another bank.
e. You use your debit card to purchase a meal at a restaurant for $100.

2. The First National Bank receives an extra $100 of reserves but decides not to lend
any of these reserves out. How much deposit creation takes place for the entire
banking system?

3. If the Fed lends five banks a total of $100 million but depositors withdraw $50
million and hold it as currency, what happens to reserves and the monetary base? Use
T-accounts to explain your answer.

4. Using T-accounts, show what happens to checkable deposits in the banking system
when the Fed sells $2 million of bonds to the First National Bank.

5. If the Fed buys $1 million of bonds from the First National Bank, but an additional
10% of any deposit is held as excess reserves, what is the total increase in
checkable deposits? (Hint: Use T-accounts to show what happens at each step of the
multiple expansion process.)

6. Suppose that the required reserve ratio is 9%, currency in circulation is $620
billion, the amount of checkable deposits is $950 billion, and excess reserves are $15
billion.
a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and
the money multiplier.
b. Suppose the central bank conducts an unusually large open market purchase of
bonds held by banks of $1,300 billion due to a sharp contraction in the economy.
Assuming the ratios you calculated in part (a) remain the same, predict the effect on
the money supply.
c. Suppose the central bank conducts the same open market purchase as in part (b),
except that banks choose to hold all of these proceeds as excess reserves rather than
loan them out, due to fear of a financial crisis. Assuming that currency and deposits
remain the same, what happens to the amount of excess reserves, the excess reserve
ratio, the money supply, and the money multiplier?
d. Following the financial crisis in 2008, the Federal Reserve began injecting the
banking system with massive amounts of liquidity, and at the same time, very little
lending occurred. As a result, the M1 money multiplier was below 1 for most of the
time from October 2008 through 2011. How does this scenario relate to your answer
to part (c)?