Ch 10: Central Banking and Money Supply

Feds control

monetary base = reserves + currency

Open market operations

buying and selling of government securities to control the monetary base and influence interest rates.

• buying bonds: adds reserves(pays banks) monetary base increases and interest rates decrease

• sell bonds: removes reserves (takes $ from banks): monetary basse decreases interest rates increase

Money Supply

M = deposits + currency

Money Multiplier

M = ((1+c)/(r+e+c))*MB

• c= C/D

• e = ER/D

• r = reserve ratio

Ht (bank deposits)

total bank deposits in period t. the amount of goods agents deposit to banks in period t.

• banks are required to hold reserve ratio*Ht in deposits (γHt)

• the rest (1-γ)Ht is invested into capital

Price Level Equation

• pt​=Mt/γHt OR pt+1/t​pt =Mt​+1/Mt​​⋅Ht+1​/Ht​​

• Mt= nominal amount of fiat money in circulation (reserves)

• γHt = real demand for money (deposits x reserve requirement)

• price level increases when more money is chasing fewer deposits