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Chapter 17. The Central Bank Balance Sheet and the Money Supply Process. The Central Bank’s Balance Sheet. Web Link. The Central Bank’s Balance Sheet. Assets Securities Fed holds only U.S. Treasury securities controlled through purchases and sales known as “open market operations.”
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Chapter 17 The Central Bank Balance Sheetand the Money Supply Process
The Central Bank’s Balance Sheet Web Link
The Central Bank’s Balance Sheet Assets • Securities • Fed holds only U.S. Treasury securities • controlled through purchases and sales known as “open market operations.” • Foreign Exchange Reserves • bonds issued by foreign governments • Loans • Discount Loans • Float
The Central Bank’s Balance Sheet Liabilities • Currency • Government Accounts • Reserves • Commercial Bank’s Checking Accounts
The Monetary Base Monetary Base (or High-Powered Money) • Currency held by the public + reserves in the banking system • Bank Reserves = Vault Cash + Deposits at the Fed. • The central bank can control the size of the monetary base.
Changing Size and Composition of the Balance Sheet Open Market Operations • The Federal Reserve buys or sells securities in financial markets.
Changing Size and Composition of the Balance Sheet Open Market Operations
Changing Size and Composition of the Balance Sheet Foreign Exchange Intervention
Changing Size and Composition of the Balance Sheet Foreign Exchange Intervention
Changing Size and Composition of the Balance Sheet Discount Loans
Changing Size and Composition of the Balance Sheet • Discount Loans Discount Loans
Changing Size and Composition of the Balance Sheet • Cash Withdraws Cash Withdraws
Changing Size and Composition of the Balance Sheet Cash Withdraws
Changing Size and Composition of the Balance Sheet Cash Withdraws
Deposit Expansion Multiplier Deposit Creation in a Single Bank
Deposit Expansion Multiplier Deposit Creation in a Single Bank Types of Reserves • Actual Reserves (R) • Required Reserves (RR=rDD) • Excess Reserves (ER)
Deposit Expansion Multiplier Deposit Creation in a Single Bank
Deposit Expansion Multiplier Deposit Creation in a Single Bank
Deposit Expansion Multiplier Deposit creation in a single bank • As a result of a $100,000 purchases of securities from bank by the Fed • M1 increases $100,000. • Checkable deposits increase $100,000.
Deposit Expansion Multiplier Deposit creation by a system of banks • Assume • Bank hold no excess reserves. • The reserve requirement ratio is 10% • Currency holding doe not change when deposits and loans change. • When a borrower writes a check, none of the recipients of the funds deposit them back in the bank that initially made the loan.
Deposit Expansion Multiplier Deposit creation by a system of banks
Deposit Expansion Multiplier Deposit creation by a system of banks
Deposit Expansion Multiplier Deposit creation by a system of banks
Retains $8,100 in Retains $9,000 in Retains $7,290 in Retains $10,000 Reserves Reserves Reserves in Reserves Deposit Expansion Multiplier Figure 17.17: Multiple Deposit Creation $100,000 $100,000 Reserves Reserves First Bank Office Builders Inc. $100,000 Federal Reserve Loan Federal Reserve $100,000 $100,000 Securities Securities $100,000 Payment $100,000 $100,000 American Steel Co. Third Bank Second Bank $90,000 $90,000 Deposit Deposit Loan Loan Retains $9,000 in Retains $10,000 Reserves in Reserves $81,000 $81,000 $72,900 $72,900 $65,610 $65,610 Fourth Bank Fifth Bank Loan Loan Loan Loan Loan Loan and on and on and on. and on. Assuming a 10 percent reserve requirement, banks hold Assuming a 10 percent reserve requirement, banks hold no excess reserves, and there are no changes its currency holdi no excess reserves, and there are no changes its currency holdi ngs. ngs.
Deposit Expansion Multiplier Deposit creation by a system of banks • RR = rDD or ΔRR = rDΔD • So for every dollar increase in reserves, deposits increase by
Deposit Expansion Multiplier Deposit creation by a system of banks • RD=10% (0.10), and ΔRR=$100,000 • ΔD= • ΔD= $1,000,000
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws. Assume: • 5% withdraw of cash. • Excess reserves of 5% of deposits
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws.
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws. • The desire of banks to hold excess reserves and the desire of account holders to withdraw cash both reduce the impact of a given change in reserves on the total deposits in the system. The more excess reserves banks desire to hold, and the more cash that is withdrawn, the smaller the impact.
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws. Ratios • Excess Reserve Ratio {ER/D} • Currency Ratio {C/D}
Deposit Expansion Multiplier Deposit Expansion with Excess Reserves and Cash Withdraws.
Deposit Expansion Multiplier The Quantity of Money (M) Depends on: • The Monetary base (MB), Controlled by the Fed. • Reserve Requirements • Bank’s desired to hold excess reserves. • The public’s demand for currency.
Chapter 17 End of Chapter
