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BERNANKE

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.

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BERNANKE

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  1. How is the banking system like a magnifying glass? BERNANKE

  2. 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

  3. Sometimes people choose to deposit more of their money in banks…. BERNANKE

  4. M = C + R/r M = 100 + 100/0.2 M = 100 + 500 = 600 50 150 50 750 800

  5. Sometimes people withdraw their money from banks…. BERNANKE

  6. M = C + R/r M = 100 + 100/0.2 M = 100 + 500 = 600 150 50 150 250 400

  7. Sometimes the Board of Governors decreases the required reserve ratio…. BERNANKE

  8. M = C + R/r M = 100 + 100/0.2 M = 100 + 500 = 600 0.1333 750 850

  9. Sometimes the Board of Governors decreases the discount rate…. BERNANKE

  10. M = C + R/r M = 100 + 100/0.2 M = 100 + 500 = 600 150 750 850

  11. Sometimes the FOMC decides to buy more Treasury bills…. BERNANKE

  12. M = C + R/r M = 100 + 100/0.2 M = 100 + 500 = 600 150 750 850

  13. In late 1999, a lot of people were worried about Y2K because…. BERNANKE

  14. We know that M = C + D. Let’s define the monetary base (B) as B = C + R We know that R = rD. Let’s recognize that people make their own choices about the preferred ratio of currency to checking-account money. That is, k = C/D. We can write C = kD, where k is the preferred proportion. So, M = C + D = kD + D = (k + 1)D And B = C + R = kD + rD = (k + r)D

  15. So, M = C + D = kD + D = (k + 1)D And B = C + R = kD + rD = (k + r)D

  16. So, M = C + D = kD + D = (k + 1)D And B = C + R = kD + rD = (k + r)D MB (k + 1)D (k + r)D (k + 1) (k + r) = = (k + 1) (k + r) M = B

  17. Suppose we know: C = 500 and R = 100, k = 0.80 and r = 0.10. Can you calculate M? (k + 1) (k + r) M = B 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

  18. C = 500; R = 200 r = 0.10; k = 0.25 (k + 1) (k + r) M = B Calculate M---using the equation M = C + R/r 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

  19. C = 500; R = 200 r = 0.10; k = 0.25 (k + 1) (k + r) M = B Let the Fed add 70 worth of reserves. Calculate M---using the equation M = C + R/r 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

  20. C = 500; R = 200 r = 0.10; k = 0.25 (k + 1) (k + r) M = B 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

  21. C = 500; R = 200 r = 0.10; k = 0.25 (k + 1) (k + r) M = B 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 = kD + D = (k + 1)D D = M/(1 + k) = 2,750/(1 + 0.25) = 2,750/1.25 = 2,200 R = rD = 0.10(2,200) = 220 C = B – R = 770 – 220 = 550 k = C/D = 550/2,200 = 0.25

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