Lecture 19-20 Money Supply-2013

7/30/2019 Lecture 19-20 Money Supply-2013

1/21

2007 Thomson South-Western

Money supply and Monetary Policies

Money supply

Central Bank (Fed/RB/State Bank) roles

Monetary policies

SR/LR Phillips curve


2/21


Two Measures of the Money Stock

Billions

of Dollars

Currency

1.9%/GDP in New Zealand

Demand deposits

Travelers checks

Other checkable deposits

(11.5%/GDP in New Zealand)

Everything in M1

Savings depositsSmall time depositsMoney market

mutual fundsA few minor categories

0


3/21


THE RESERVE BANK

The RB serves as the nations central bank

with 3 functions.

It is designed to oversee the banking system.

It regulates the quantity of money in the economy

It operates like a bank with the last of resort for

banking system.


4/21


BANKS AND THE MONEY SUPPLY

Reserves are deposits that banks have received

but have not loaned out.

In afractional-reserve bankingsystem, banks

hold a fraction of the money deposited as

reserves and lend out the rest.

R is required reserve and this becomes bank

deposits to RB


5/21


BANKS AND THE MONEY SUPPLY

The reserve ratio is

the fraction of

deposits that banks

hold as reserves.


6/21


Money Creation with Fractional-ReserveBanking

When a bank makes a loan from its reserves,the money supply increases.

The money supply is affected by the amount

deposited in banks and the amount that banksloan.

Deposits into a bank are recorded as both assets andliabilities.

The fraction of total deposits that a bank has to keepas reserves is called the reserve ratio.

Loans become an asset to the bank.


7/21


Banking Money Creation with Fractional-Reserve

This T-Accountshows a bank that

accepts deposits,

keeps a portionas reserves,

and lends outthe rest.

It assumes areserve ratioof 10%.

Assets Liabilities

First National Bank

Reserves$10.00

Loans

$90.00

Deposits$100.00

Total Assets$100.00

Total Liabilities$100.00


8/21


Money Creation with Fractional-ReserveBanking

When one bank loans money, that money isgenerally deposited into another bank.

This creates more deposits and more reserves to

be lent out.

When a bank makes a loan from its reserves,

the money supply increases.


9/21


The Money Multiplier

How much money is eventually created by thenew deposit in this economy?


10/21 2007 Thomson South-Western


The money multiplieris the amount of moneythe banking system generates with each dollar

of reserves.




I ncrease in the Money Supply = $190.00!

Assets Liabilities

First National Bank

Reserves$10.00

Loans$90.00

Deposits$100.00

Total Assets$100.00


Assets Liabilities

Second National Bank

Reserves$9.00

Loans $81.00

Deposits$90.00

Total Assets$90.00





Original deposit = $100.00

1st Natl. Lending = 90.00 (=.9 x $100.00)

2nd Natl. Lending = 81.00 (=.9 x $ 90.00)

3rd Natl. Lending = 72.90 (=.9 x $ 81.00)

and on until there are just pennies left to

lend!

Total money created by this $100.00 deposit is

$1000.00. (= 1/.1 x $100.00)



Tools of Monetary Control

The RB has five tools:

Open-market operations

Changing the reserve requirement

Changing the discount rate

Changing in OCR (Official Cash Rate by the RB)

MPR and Inflation target



The Feds Tools of Monetary Control

Open-Market Operations

The RB conducts open-market operations when it

buys government bonds from or sells government

bonds to the public: When the Fed sells government bonds, the money supply

decreases.

When the Fed buys government bonds, the money supply

increases.



The RB Tools of Monetary Control

Reserve Requirements

The Fed also influences the money supply with

reserve requirements.

Reserve requirements are regulations on theminimum amount of reserves that banks must hold

against deposits.




Changing the Reserve Requirement

The reserve requirement is the amount (%) of a

banks total reserves that may not be loaned out.

Increasing the reserve requirement decreases themoney supply.

Decreasing the reserve requirement increases the

money supply.




Changing the Discount Rate

The discount rate is the interest rate RB charges

banks for loans.

Increasing the discount rate decreases the money supply. Decreasing the discount rate increases the money supply.



Official Cash Rate

New Zealand/Developed Countries are using

of OCR to do MP Key short term interest rate

RB pays for demand deposits held by CBswith the RB

Demand deposits are known as Settlement Acc

OCR (short term deposit rate) and OCR+50basis points (short term loan rate) are

announced/fixed by the RB RB decide OCR and then other nominal

interest rates will follow up

It will give effect on MS as well as interest rate

from CBs paying/charging the others



The OCR and the 90-day bank bill rate

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09

Date

Interestrate(%)

OCR 90 day bank bill rate



OCR

Exchange RateInterest rates

Economic Activity

Trading partnerinflation

CPIInflation

Inflationaryexpectations


21/21

MP and MPR

Depending on economy situation (recession/boom)

Easier MPR will be applied to recession economy

(MPR shift down to keep the same target inflationrate with lower nominal/real interest rate)

OCR will fall then we could recover the economy

from recession

Class discussion 10 munites.

Case study: pp:746-747

Lecture 19-20 Money Supply-2013

Documents

Transcript of Lecture 19-20 Money Supply-2013