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• ΔMS = m ×MB, where MS = change in the money supply; m = the money multiplier; MB= change in the monetary base. A positive sign means an increase in the MS; a negative sign means a decrease.
The money-multiplier process explains how an increase in the monetary base causes the money supply to increase by a multiplied amount. For example, suppose that the Federal Reserve carries out an open-market operation, by creating $100 to buy $100 of Treasury securities from a bank. The monetary base rises by $100. 7
/P = money supply (set by the Fed) as output increases, money demand increases and the interest rate has to increase to bringg the demand back to the su pppp lyy
Money in the IS/LM model. In the IS/LM model, the LM curve traces combinations of the rate of interest and level of real income at which the money market is in equilibrium. This reference to market equilibrium implies independent supply and demand schedules.
The Quantity Theory of Money states that there is inflation if the money supply increases at a faster rate than national income. Fisher’s equation of exchange is MV = PQ.
Currency in circulation (C) and reserves (R) compose the monetary base (MB, aka high-powered money), the most basic building blocks of the money supply. Basically, MB = C + R, an equation you’ll want to internalize. In the United States, C includes FRN and coins issued by the U.S. Treasury.
The Quantity Theory of Money is simply the hypothesis that velocity V is constant over time: V = V¯. The Quantity Theory then implies that changes in nominal GDP (P ×Y ) are exclusively
