1 / 7

Review

Review. Dollar value of Required Reserves = Amount of deposit X required reserve ratio Excess Reserves = Total Reserves – Required Reserves Maximum amount a single bank can loan = the change in excess reserves caused by a deposit The money multiplier = 1/required reserve ratio

kimn
Download Presentation

Review

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Review • Dollar value of Required Reserves = Amount of deposit X required reserve ratio • Excess Reserves = Total Reserves – Required Reserves • Maximum amount a single bank can loan = the change in excess reserves caused by a deposit • The money multiplier = 1/required reserve ratio • Total Change in Loans = amount single bank can lend X money multiplier • Total Change in the money supply = Total Change in Loans + $ amount of Fed action • Total Change in demand deposits = Total Change in Loans + any cash deposited

  2. The Money Multiplier and Multiple Deposit Expansion • The money multiplier shows us the impact of a change in demand deposits on loans and eventually the money supply. • To calculate the money multiplier, divide 1 by the required reserve ratio. Money multiplier = 1/ reserve ratio Ex. If the reserve ratio is 25%, then the multiplier = • 1/ .25 = 4 Ex. If the reserve ratio is 10%, then the multiplier=1/.1=10

  3. Types of Multiple Deposit Expansion Question • Type 1: Calculate the initial change in excess reserves • a.k.a. the amount a single bank can loan from the initial deposit • Type 2: Calculate the change in loans in the banking system • Type 3: Calculate the change in the money supply • Sometimes type 2 and type 3 will have the same result (i.e. no Fed involvement) Type 4: Calculate the change in demand deposits

  4. Example 1 • Given a required reserve ratio of 20%, assume the Federal Reserve purchases $100 million worth of US Treasury Securities on the open market from a primary security dealer. Determine the amount that a single bank can lend from this Federal Reserve purchase of bonds. The amount of new demand deposits – required reserve = The initial change in excess reserves $100 million – (20% * $100 million) $100 million – $20 million = $80 million in ER

  5. Example 2 • Given a required reserve ratio of 20%, assume the Federal Reserve purchases $100 million worth of US Treasury Securities on the open market from a primary security dealer. Determine the maximum change in loans in the banking system from this Federal Reserve purchase of bonds. The initial change in excess reserves * The money multiplier = max change in loans $80 million * (1/20%) $80 million * (5) = $400 million max in new loans

  6. Example 3 • Given a required reserve ratio of 20%, assume the Federal Reserve purchases $100 million worth of US Treasury Securities on the open market from a primary security dealer. Determine the maximum change in the money supply from this Federal Reserve purchase of bonds. The maximum change in loans + $ amount of Federal Reserve action $400 million + $100 million = $500 million max change in the money supply

  7. Example 4 • Given a required reserve ratio of 20%, assume the Federal Reserve purchases $100 million worth of US Treasury Securities on the open market from a primary security dealer. Determine the maximum change in demand deposits from this Federal Reserve purchase of bonds. The maximum change in loans + $ amount of initial deposit ER*money multiplier+$amount of initial deposit ($500*.8)=$400+$100 $400 million + $100 million = $500 million max change in demand deposits

More Related