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How Is Money Measured in the United States Today?

How Is Money Measured in the United States Today?. M1: The Narrowest Definition of the Money Supply: Means of Payment. Measuring the Money Supply, May 2007. M2: A Broader Definition of Money. What about Credit Cards and Debit Cards?. How Banks Create Money.

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How Is Money Measured in the United States Today?

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  1. How Is Money Measured in the United States Today? M1: The Narrowest Definition of the Money Supply: Means of Payment Measuring the Money Supply, May 2007 M2: A Broader Definition of Money What about Credit Cards and Debit Cards?

  2. How Banks Create Money Balance Sheet for Wachovia Bank, December 31, 2006

  3. Reserves Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve = R Required reserves Reserves that a bank is legally required to hold, based on its checking account deposits = RR. Required reserve ratio The minimum fraction of deposits banks are required by law to keep as reserves RR = r D.

  4. How Banks Create Money in a Fractional Reserve Banking System: Using T-Accounts

  5. How Banks Create Money Now PNC has excess reserves and can make a loan

  6. How Banks Create Money: The multiple creation of money and credit Deposit multiplier The ratio of the amount of deposits created by banks to the amount of new reserves. Simple deposit multiplier = 1/r The Simple Deposit Multiplier versus the Real-World Deposit Multiplier: People hold currency and banks hold excess reserves, slowing multiple creation of deposits and credit

  7. Reserves Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve = R = RR + ER = rD + eD Required reserves Reserves that a bank is legally required to hold, based on its checking account deposits = RR. Required reserve ratio The minimum fraction of deposits banks are required by law to keep as reserves RR = r D. Excess reserves Reserves that banks hold over and above the legal requirement. ER =e D

  8. The Money Supply Model • Money = Currency plus checkable deposits: M1 M = C + D • The monetary base (MB)—the assets of the central bank— “backs” the money supply • The CB’s assets = MB =The CB’s liabilities = C + R • The Fed controls the monetary base (MB) better than it controls reserves … but it doesn’t perfectly control MB MB = MBn + BR • The money supply (M) is a multiple m of the monetary base M = m x MB = m x (MBn + BR)

  9. Factors that AffectThe Money Multiplier • Changes in the required reserve ratio r • The money multiplier and the money supply are negatively related to r • Changes in the currency ratio c • The money multiplier and the money supply are negatively related to c • Changes in the excess reserves ratio e • The money multiplier and the money supply are negatively related to the excess reserves ratio e • The excess reserves ratio e is negatively related to the market interest rate • The excess reserves ratio e is positively related to expected deposit outflows

  10. Money and the Great Depression • The Great Contraction in monetarist analysis • Banking Crises • Currency holdings • Excess reserve holdings • Monetary contraction

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