INTRODUCTION TO MONEY AND BANKING. Tables and Graphs Part 3
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1 INTRODUCTION TO MONEY ND BNKING Tables and Graphs Part 3
2 Table of Definitions TR = Total Reserves-Definition* RR = Required Reserves-Definition* ER = Excess Reserves-Definition* r = Minimum Reserve Ratio = RR/DD = ΔRR/ΔDD GS = Government Securities = oans DD = Demand Deposits = ssets = iabilities NW = = Net Worth
3 Figure D-2.1: Bank s Balance Sheet Bank TR = $1m RR = $1m ER = $0m GS = $6m = $4m DD = $10m NW = $1m NOTE: (1) r = 10% and since ER = 0, Bank is fully loaned up. (2) TR = RR + ER. (3) = + NW and TR + GS + = DD + NW.
4 Figure D-2.2: The Banking System s Balance Sheet When r = 10% Banking System TR = $50m RR = $50m ER = $0m GS = $120m = $355m DD = $500m NW = $25m NOTE: r = 10% and since ER = 0, the Banking System is fully loaned up (ER = 0 for all banks in the Banking System).
5 Figure D-2.3: The Fed s Balance Sheet Federal Reserve District Bank GS = $140m MBS =$500m FRN = $80m MBR = $550m T = $10m GS = Government Securities FRN = Federal Reserve Notes MBR = Member Bank Reserves T = Treasury Checking ccount MBS = Mortgage Backed Securities
6 Figure D-2.4a: Purchase of $1M in GS from Bank : The Fed s First Balance Sheet 1. Federal Reserve District Bank GS = $140m MBS = $500m FRN = $100m MBR = $550m T = $10m
7 Figure D-2.4b: Purchase of $1M in GS from Bank : The Fed s Second Balance Sheet 2. Federal Reserve District Bank GS = $141m MBS = $500m FRN = $100m MBR = $551m T = $10m The Fed purchases $1m in GS from Bank.
8 Figure D-2.5a: Bank s First Balance Sheet 1. Bank TR = $1m RR = $1m ER = $0m GS = $6m = $4m DD = $10m NW = $1m NOTE: r = 10% and since ER = 0, Bank is fully loaned up.
9 Figure D-2.5b: Bank s Second Balance Sheet 2.a. The Fed purchases $1m in GS from Bank. b. Money Creation Step: Bank loans out $1m and creates a DD of $1m. c. Clearing Step: $1m is spent and deposited in Bank B. Bank B gains $1m in TR and Bank loses $1m in TR. 2. Bank a. b. c. TR = $2m RR = $1m ER = +$1m GS = $5m = $4m Δ = +$1m ΔTR = -$1m DD = $10m NW = $1m ΔDD = +$1m ΔDD = -$1m
10 Figure D-2.5c: Bank s Third Balance Sheet 3. Bank TR = $1m RR = $1m ER = 0 GS = $5m = $5m DD = $10m NW = $1m NOTE: Bank is fully loaned up and its Balance Sheet balances.
11 Figure D-2.6a: Bank s First Balance Sheet 1. Bank TR = $1m RR = $1m ER = $0m GS = $6m = $4m DD = $10m NW = $1m NOTE: r = 10% and since ER = 0, Bank is fully loaned up.
12 Figure D-2.6b: Bank s Second Balance Sheet 2.a. The Fed purchases $1m in GS from Bank. b. Money Creation Step: Bank loans out $1m and creates a DD of $1m. c. Clearing Step: $1m is spent and deposited in Bank B. Bank B gains $1m in TR and Bank loses $1m in TR. 2. a. b. c. TR = RR = ER = GS = = Bank DD = NW = $1m Δ = ΔDD = ΔTR = ΔDD =
13 Figure D-2.6c: Bank s Third Balance Sheet 3. Bank TR = RR = ER = GS = = DD = NW = NOTE: Bank is fully loaned up and its Balance Sheet balances.
14 Figure D-2.6d: Bank B s First Balance Sheet Bank B TR = $1m RR = $1m ER = $0m GS = $6m = $4m DD = $10m NW = $1m NOTE: r = 10% and since ER = 0, Bank B is fully loaned up.
15 Figure D-2.6e: Bank B s Second Balance Sheet 2.a. check for $1m is deposited in Bank B and Bank B receives $1m in TR from Bank in the clearing step. b. DD Creation: Bank B loans out $0.9m and creates DD of $0.9m. c. Clearing Step: $0.9m is spent and deposited in Bank C. Bank C gains $0.9m in TR and Bank B loses $0.9m in TR. 2. a. b. c. TR = RR = ER = GS = = Bank B DD = NW = Δ = ΔDD = ΔTR = ΔDD =
16 Figure D-2.6f: Bank B s Third Balance Sheet 3. Bank B TR = RR = ER = GS = = DD = NW = NOTE: Bank B is fully loaned up and its Balance Sheet balances.
17 Table D-2.1a: Summary of Deposit Expansion Process Bank ΔTR ΔRR ΔER Δ ΔDD ΣΔDD B C D $1.00m $0.00m $1.00m $1.00m $1.00m $1.00m $1.00m $0.10m $0.90m $0.90m $0.90m $1.90m $0.90m $0.09m $0.81m $0.81m $0.81m $2.71m $0.81m $0.08m $0.73m $0.73m $0.73m $3.44m E Other Banks Totals
18 Figure D-2.7a: The Banking System s First Balance Sheet When r = 10% 1. Banking System TR = $50m RR = $50m ER = $0m GS = $140m = $335m DD = $500m NW = $25m NOTE: r = 10% and since ER = 0, the Banking System is fully loaned up (ER = 0 for all banks in the Banking System).
19 Figure D-2.7b: Banking System s Second Balance Sheet 2.a. Fed purchases $1m in GS from Bank b. Money Creation Step: Banking System creates a multiple number of s and DDs. (Note that the Banking System can do this because it does NOT lose the DDs it creates.) 2. a. b. TR = $51m RR = $50m ER = +$1m GS = $139m = $335m Δ = +$10m Banking System DD = $500m NW = $25m ΔDD = +$10m
20 Figure D-2.7c: Banking System s Third Balance Sheet 3. Banking System TR = $51m RR = $51m ER = 0 GS = $139m = $345m DD = $510m NW = $25m NOTE1: Banking System is fully loaned up and the Money Supply (DDs) has increased.
21 Figure D-2.8a: The Banking System s First Balance Sheet When r = 10% 1. Banking System TR = $50m RR = $50m ER = $0m GS = $140m = $335m DD = $500m NW = $25m NOTE: r = 10% and since ER = 0, the Banking System is fully loaned up (ER = 0 for all banks in the Banking System).
22 Figure D-2.8b: Banking System s Second Balance Sheet 2.a. Depositors convert $1m in DDs to C b. Money Destruction Step: Banking System destroys a multiple number of s and DDs. (s people use DDs to pay off their s banks do not renew loans.) 2. a. b. TR = RR = ER = GS = = Banking System DD = NW = Δ = ΔDD =
23 Figure D-2.8c: Banking System s Third Balance Sheet 3. Banking System TR = RR = ER = GS = = DD = NW = NOTE: Banking System is fully loaned up and the Money Supply (DDs) has decreased.
24 Complex Multiplier Formulas c = Currency Deposit Ratio = C/DD > 0 er = Excess Reserve Ratio = ER/DD > 0 MB = Monetary Base = TR + C mm* = Complex Multiplier mm* = (1 + c)/(r + er + c) M S = C + DD M S = C + DD M S = mm*(mb) M S = mm*( MB)
25 Figure E-1.1: Supply and Demand for Money M S 1/P P $1.00 $0.66 $0.50 $0.40 M D M
26 Figure E-1.2: Illustrating an Excess Demand for Money in the Money Market 1/P M S Money Market $0.50 $0.40 ED M 1 M 2 M D M NOTE: When the price level is P = 250 there is an ES in the goods markets and ED in the money market. The adjustment process in the goods markets drives prices down in all markets (deflation)instantaneously.
27 Figure E-1.3: Illustrating an Excess Supply of Money 1/P M S $0.66 ES Money Market $0.50 M 0 M 1 M M D NOTE: When the price level is P = 150 there is an ED in the goods markets and ES in the money market. The adjustment process in the goods markets drives prices up in all markets (inflation) instantaneously
28 Figure G-1.1: Illustrating the Inflationary Process When a Central Bank Overissues Money 1/P M S M S 0 1 1/P 0 ES Money Market 1/P 1 M D M 0 M 1 M NOTE: When the money supply increases from M S 0 to M S 1 the Central Bank has over issued money. But the only indication that it has that overissue has occurred is when the adjustment process has run its long and disruptive course with prices rising to P 1 (no instantaneous adjustment).
29 Figure G-1.2: Illustrating the djustment Process when Free Banks Overissue Money 1/P M S 0 M S 1 1/P 0 ES Money Market 1/P 1 M D M 0 M 1 M NOTE: When the price level is P 0 and free banks overissue money so that the money supply is now M S 1 there is an immediate reaction to reduce the money supply (because of adverse clearings) and all the adjustment occurs in the shortrun in the money market, not the goods market.
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