1、Chapter 16Determinants of the Money Supply 2005 Pearson Education Canada Inc. 2005 Pearson Education Canada Inc.16-2The Simple Deposit Multiplier from Chapter 15Simple Deposit Multiplier1D = RrDeriving the formulaR = DR = r D1D = Rr1D = Rr 2005 Pearson Education Canada Inc.16-3Critique of the Simple
2、 ModelThe simple model of multiple deposit creation shows how the Bank of Canada can control D by setting R. That simple model however, ignores 1. the publics decisions regarding how much C to hold, 2. the banks decisions regarding the amount of R they wish to hold, and3. borrowers decisions on how
3、much to borrow from banks. Recall also that the Bank of Canada can exert more precise control over MB ( = C + R) than over R. 2005 Pearson Education Canada Inc.16-4The Money Supply ModelBecause the Bank of Canada can exert more precise control over MB than it can over R, in Chapter 16 we derive a mu
4、ltiplicative relation between M and MB, M = m MB,where m is the money multiplier. m relates the change in M to a given change in MB. 2005 Pearson Education Canada Inc.16-5M = m MBDeriving Money MultiplierR = DRDR = r DR = (r D)Adding C to both sidesR + C = MB = C + (r D)1. Tells us amount of MB need
5、ed support D and C2. An extra $1 of MB that arises from an extra $1 of C does not support any additional D. That is, the C component of MB does not lead to a multiple deposit creation as the R component does. Money Multiplier 2005 Pearson Education Canada Inc.16-6To put it differently, An in MB that
6、 goes into C is not multiplied, whereas an that goes into supporting deposits is multiplied.We haveMB = C + (r D)To deal with currency drains, we also assume thatC = c Dwhere c is the currency ratio. Hence,MB = (c D) + (r D) = (c + r ) D(Continued) 2005 Pearson Education Canada Inc.16-7M = (c D) + D
7、 = (1 + c) Dm 1/r because no multiple expansion for currency and because as D ER MBrcD 1MBrc cM 1rccm 1 2005 Pearson Education Canada Inc.16-8r = 5%C = $40 billionD = $160 billionM (= M1+) = C + D = $200 billionThe money multiplier tells us that given the behavior of the public as represented by c =
8、 0.25 and that of banks as represented by r = 5%, a $1 in MB will lead to a $4.2 in M.If c = 0 (no currency drains), then m = 20 .An Example2.405.025.0 25.01 m 2005 Pearson Education Canada Inc.16-9Also notice that This is the deposit multiplier when c = 25% and r = 5%. It tells us that given the be
9、havior of the public as represented by c = 25% and that of banks as represented by r = 5%, a $1 in MB will lead to a $3.3 in D.(Continued)3.305.025.0 1 2005 Pearson Education Canada Inc.16-10So far we have been assuming that the Bank has complete control over MB. This is not the case. The Bank lacks
10、 complete control over MB because it cannot unilaterally determine the amount of borrowing by banks from the Bank.Here we split MB into two components: nonborrowed monetary base (MBn). This component of the MB is directly under the Banks control because it results from open market operations. borrowed monetary base (or advances A). This is the less tightly controlled component of the base, because it is influenced by banks decisions.The Full Model
