Search results
Write the equation that helps us to understand how changes in the monetary base affect the money supply. Explain why the M2 multiplier is almost always larger than the m1 multiplier. Explain why the required reserve ratio, the excess reserve ratio, and the currency ratio are in the denominator of the m1 and m2 money multipliers.
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
The equation assumes that velocity is constant, and that Q is independent of the supply of money. Only supply-side factors affect Q. it is assumed V is constant because the frequency that workers are paid does not change often. The equation argues that increasing the money supply causes inflation.
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.
Definition 24 The money multiplier is the change in money supply that results from a change in high powered money. We can also calculate total bank lending. The reserve to deposit ratio is the fraction of. e (R − R0) = 0. Calculate M, (R), C, D, T R. Calculate the change in H to get a $30 increase in M. We have k (R) = 3 2. 3 2$20 = $30.
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.
goods demand = C + I + G (+NX) = Y = goods supply (set by maximizing firms) • as the interest rate increases, I and C fall and the demand for goods falls • IS curve is downward sloppg ing. 2) MARKET II : MONEY MARKET • money demand = L. d (Y, r + π. e) = M. s /P = money supply (set by the Fed) •
