16-1

Money MultiplierM = m MB (Money Supply = multiplier x Monetary Base,

where MB = Currency + Reserves)

Deriving Money MultiplierR = RR + ER , (Reserves = Req. Res. + Excess Res.)

RR = r D, (Req. Res. = reserve ratio x Deposits)

R = (r D) + ER

Adding C to both sidese=ER/D, c = C/D, assuming proportionality of ER & C vs. D

R + C = MB = (r D) + ER + C1. Tells us amount of MB needed support D, ER and C2. $1 of MB in ER, not support D or C

MB = (r D) + (e D) + (c D)= (r + e + c) D

16-2

1D = MB

r + e + c

M = D + (c D ) = (1 + c) D

1 + cM = MB

r + e + c

1 + cm =

r + e + c

m < 1/r because no multiple expansion for currency and because as D ER Changes dm/dc, dm/de, dm/dr?

Full ModelM = m (MBn + DL), where MBn is non-borrowed MB and DL are discount loans

16-3

Excess Reserves Ratio

Determinants of e1. i , relative Re on ER (opportunity cost ), e 2. Expected deposit outflows, ER insurance worth more, e

16-4

Factors Determining Money Supply

16-5

Money Supply

16-6

Determinants of the Money Supply

16-7

Deposits at Failed Banks: 1929–33

16-8

e, c: 1929–33

16-9

Money Supply and Monetary Base: 1929–33