The economics of money, banking, and financial markets

CHAPTER 14

The Money Supply Process 

318

Three Players in the Money Supply Process ........................................................................318

The Fed’s Balance Sheet ............................................................................................................318

Liabilities ............................................................................................................................ 319

Assets ................................................................................................................................. 320

Control of the Monetary Base .................................................................................................320

Federal Reserve Open Market Operations ........................................................................... 321

Shifts from Deposits into Currency ..................................................................................... 322

Loans to Financial Institutions ............................................................................................ 323

Other Factors That Affect the Monetary Base ...................................................................... 323

Overview of the Fed’s Ability to Control the Monetary Base ................................................ 324

Multiple Deposit Creation: A Simple Model .......................................................................325

Deposit Creation: The Single Bank ..................................................................................... 325

Deposit Creation: The Banking System ............................................................................... 326

Deriving the Formula for Multiple Deposit Creation........................................................... 329

Critique of the Simple Model ............................................................................................. 330

Factors That Determine the Money Supply .........................................................................331

Changes in the Nonborrowed Monetary Base, 

MB

n

 ............................................................. 331

Changes in Borrowed Reserves, 

BR, from the Fed ............................................................... 331

Changes in the Required Reserve Ratio, 

rr .......................................................................... 332

Changes in Excess Reserves ................................................................................................ 332

Changes in Currency Holdings ........................................................................................... 332

Overview of the Money Supply Process ...............................................................................332

The Money Multiplier ................................................................................................................333

Deriving the Money Multiplier ........................................................................................... 333

Intuition Behind the Money Multiplier ............................................................................... 335

Money Supply Response to Changes in the Factors ............................................................. 336

APPLICATION

 Quantitative Easing and the Money Supply, 2007–2017 ..................337

Summary 339  •  Key Terms 339  •  Questions 339  •  Applied Problems 340  •   

Data Analysis Problems  341   •   Web Exercises  341   •   Web References  342