Chapter16MultipledepositCreationandtheMoney

SupplyProcessChapter16MultipledepositCrePlayersintheMoneySupplyProcessCentralbank(FederalReserveSystem)Banks(depositoryinstitutions;financialintermediaries)Depositors(individualsandinstitutions)Borrowersfrombanks(individualsandinstitutionsthatborrowandinstitutionsthatissuebonds)PlayersintheMoneySupplyPrFed’sBalanceSheetFederalReserveSystemAssetsLiabilitiesGovernmentsecuritiesCurrencyincirculationDiscountloansReservesFed’sBalanceSheetFederalResMonetaryLiabilitiesCurrencyincirculation:inthehandsofthepublicReserves:bankdepositsattheFedandvaultcashReserves=requiredreserves+excessreservesAssetsGovernmentsecurities:holdingsbytheFedthataffectmoneysupplyandearninterestDiscountloans:providereservestobanksandearnthediscountrateVeryimportantChangesintheassetitemsleadtochangesinreservesandconsequentlytochangesinthemoneysupply.Theseassetsearninterestwhiletheliabilitiesdonot.MonetaryLiabilitiesMonetaryBaseMonetaryBaseOpenMarketPurchasefromaBankNetresultisthatreserveshaveincreasedby$100NochangeincurrencyMonetarybasehasrisenby$100BankingSystemFederalReserveSystemAssetsLiabilitiesAssetsLiabilitiesSecurities-$100Securities+$100Reserves+$100Reserves+$100OpenMarketPurchasefromaBaOpenMarketPurchasefrom

NonbankPublicIPersonsellingbondstotheFeddepositstheFed’scheckinthebankIdenticalresultasthepurchasefromabankBankingSystemFederalReserveSystemAssetsLiabilitiesAssetsLiabilitiesReserves+$100Checkabledeposits+$100Securities+$100Reserves+$100OpenMarketPurchasefrom

NonOpenMarketPurchasefrom

NonbankPublicIIThepersonsellingthebondscashestheFed’scheckReservesareunchangedCurrencyincirculationincreasesbytheamountoftheopenmarketpurchaseMonetarybaseincreasesbytheamountoftheopenmarketpurchaseNonbankPublicFederalReserveSystemAssetsLiabilitiesAssetsLiabilitiesSecurities-$100Securities+$100Currencyincirculation+$100Currency+$100OpenMarketPurchasefrom

NonOpenMarketPurchase:SummaryTheeffectofanopenmarketpurchaseonreservesdependsonwhetherthesellerofthebondskeepstheproceedsfromthesaleincurrencyorindepositsTheeffectofanopenmarketpurchaseonthemonetarybasealwaysincreasesthemonetarybasebytheamountofthepurchaseOpenMarketPurchase:SummaryTOpenMarketSaleReducesthemonetarybasebytheamountofthesaleReservesremainunchangedTheeffectofopenmarketoperationsonthemonetarybaseismuchmorecertainthantheeffectonreservesNonbankPublicFederalReserveSystemAssetsLiabilitiesAssetsLiabilitiesSecurities+$100Securities-$100Currencyincirculation-$100Currency-$100OpenMarketSaleReducesthemoShiftsfromDepositsintoCurrencyNonbankPublicBankingSystemAssetsLiabilitiesAssetsLiabilitiesCheckabledeposits-$100Reserves-$100Checkabledeposits-$100Currency+$100FederalReserveSystemAssetsLiabilitiesCurrencyincirculation+$100Reserves-$100ShiftsfromDepositsintoCurrMakingaDiscountLoantoaBankMonetaryliabilitiesoftheFedhaveincreasedby$100MonetarybasealsoincreasesbythisamountBankingSystemFederalReserveSystemAssetsLiabilitiesAssetsLiabilitiesReserves+$100Discountloans+$100Discountloan+$100Reserves+$100(borrowingfromFed)(borrowingfromFed)MakingaDiscountLoantoaBaPayingOffaDiscountLoanfromtheFedNeteffectonmonetarybaseisareductionMonetarybasechangesone-for-onewithachangeintheborrowingsfromtheFederalReserveSystemBankingSystemFederalReserveSystemAssetsLiabilitiesAssetsLiabilitiesReserves-$100Discountloans-$100Discountloans-$100Reserves-$100(borrowingfromFed)(borrowingfromFed)PayingOffaDiscountLoanfroOtherFactorsAffectingtheMonetaryBaseFloatTreasurydepositsattheFederalReserveInterventionsintheforeignexchangemarketTheyarenotfullycontrolledbythecentralbank.OtherFactorsAffectingtheMoAlthoughfloatandTreasurydepositswiththeFedundergosubstantialshort-runfluctuations,theydonotpreventtheFedfromaccuratelycontrollingit.OpenmarketoperationsarecontrolledbytheFedTheFedcannotdeterminetheamountofborrowingbybanksfromtheFedSplitthemonetarybaseintotwocomponents

MBn=MB-BRThemoneysupplyispositivelyrelatedtoboththenon-borrowedmonetarybaseMBn

and

tothelevelofborrowedreserves,BR,from

theFedFed’sAbilitytoControltheMonetaryBaseAlthoughfloatandTreasurydeMultipleDepositCreation:ASimpleModelMultipledepositcreation:WhentheFedsuppliesthebankingsystemwith$1ofadditionalreserves,depositsincreasebyamultipleofthisamount.MultipleDepositCreation:ASDepositCreation:SingleBankFirstNationalBankFirstNationalBankAssetsLiabilitiesAssetsLiabilitiesSecurities-$100Securities-$100Checkabledeposits+$100Reserves+$100Reserves+$100Loans+$100FirstNationalBankAssetsLiabilitiesSecurities-$100Loans+$100DepositCreation:SingleBankFDepositCreation:

TheBankingSystemBankABankAAssetsLiabilitiesAssetsLiabilitiesReserves+$100Checkabledeposits+$100Reserves+$10Checkabledeposits+$100Loans+$90BankBBankBAssetsLiabilitiesAssetsLiabilitiesReserves+$90Checkabledeposits+$90Reserves+$9Checkabl