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money supply process
It first introduces the Federal Reserve's balance sheet, and then discusses the determinants of base money, money supply, and the meaning behind the money multiplier.
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money supply process
- bacteria
This is a mind map about bacteria, and its main contents include: overview, morphology, types, structure, reproduction, distribution, application, and expansion. The summary is comprehensive and meticulous, suitable as review materials.
- Plant asexual reproduction
This is a mind map about plant asexual reproduction, and its main contents include: concept, spore reproduction, vegetative reproduction, tissue culture, and buds. The summary is comprehensive and meticulous, suitable as review materials.
- Reproductive development of animals
This is a mind map about the reproductive development of animals, and its main contents include: insects, frogs, birds, sexual reproduction, and asexual reproduction. The summary is comprehensive and meticulous, suitable as review materials.
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money supply process
Federal Reserve's Balance Sheet
Liabilities
currency in circulation
Reserves (includes deposits at the Fed and actual currency held by banks)
statutory reserves
excess reserves
assets
securities
Loans to financial institutions
The main way the Fed provides reserves to banks
base currency
base currency
The Fed's total monetary liabilities (sum of currency in circulation and reserves)
Monetary liabilities of the U.S. Treasury (fiscal currency in circulation, mainly coinage)
MB (base money) = C (currency in circulation) R (total reserves of the banking system)
Influencing factors
The conversion of deposits into currency also affects reserves in the banking system, but this conversion does not affect the monetary base
Fed open market operations
Open market purchases - increase the monetary base
Open market sale – reducing the monetary base
Loans to financial institutions – increasing the monetary base
Float – temporary increase in total reserves
Federal Reserve Treasury Deposits
Fed intervenes in foreign exchange market
An overview of the Fed's ability to control the monetary base
Open market operations and loans to financial institutions are the two main factors that determine the money supply
base currency
non-borrowed base currency
Fully under the control of the Fed
= Base Money – Bank loans to the Fed
(MBn=MB-BR)
borrowing reserves
Determinants of money supply
The money supply is positively related to the non-borrowed base money MBn
Money supply is positively related to the level of reserves borrowed from the Fed BR
Money supply is negatively related to the legal reserve ratio rr
Money supply is negatively related to the scale of excess reserves
Assuming excess reserves remain constant, the money supply is negatively related to currency holdings
The meaning behind the money multiplier
Although deposits can expand many times, currency cannot
Since c>0, when the base money MB and checking deposits D increase, the inflation level does rise.
Any part of the increase in MB that is converted into an increase in currency does not have a multiplier effect. Therefore, only part of the increase in base money can achieve multiple expansion to support the expansion of check deposits.
Since e>0, any increase in base money and deposits results in higher excess reserves
In the case of a very high excess reserve ratio e, when $1 of deposits is converted into currency, the level of excess reserves drops significantly, freeing up some reserves to support more deposits and pushing the money multiplier upward.
Although the base money increased significantly during the quantitative easing process, the increase in money supply was much smaller because the money multiplier dropped by about 50% (the excess reserve ratio e increased unusually)