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AAssets ALiabilities + ANet Worth

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AAssets ALiabilities + ANet Worth

Fed funds sold to Bank Two +$10,000

EXAMPLE 9.10. Suppose the reserve requirement on check-writing deposits is 0.10 and reserves held by all banks ^^ total $500,000. The maximum amount of check-writing deposits for the banking system is $5,000,000. [Dmax = dR\ Mathcad d = yr d = j/q ]0; j = 10; since R = $500,000, Dmax = (10)$500,000 = $5,000,000.]

9.6 DETERMINANTS OF THE Ml MONEY SUPPLY

The Ml money supply consists of currency outside banks (C) plus check-writing deposits (D). The sum of C and D can also be presented as the product of an ml money multiplier times the monetary base B, where B is the sum of currency outside banks plus reserves held by all banks. Thus, Ml = C + D or Ml = m\{B). The ml money multiplier equals (1 + c)/(r + c), where r is the reserve requirement on check-writing deposits, and c, the currency ratio, is the ratio of currency outside banks to check-writing deposits (c = C/D). The MX money supply, at any point in time, depends upon the amount of reserves (R) held by banks, the reserve requirement set by the central bank, and the currency preferences of the private sector.

EXAMPLE 9.11. Suppose currency outside banks is $200, reserves held by banks total $100, the currency ratio is 0.20, and the reserve requirement on check-writing deposits is 10% (r = 0.10). The Ml money supply is $1200 Mathcad when banks hold no excess reserves. This sum is found by adding Dmax, where Dmax = 10($100) = $1000, and C = $200. The $1200 Ml money supply is also found by the formula Ml = ml(fi). The monetary base (B) is $300— the sum of currency outside banks ($200) plus reserves held by banks ($100). The ml money multiplier is 4 when the currency ratio is 0.20, since ml = (1 + c)/(r + c); ml = (1 + 0.20)/(0.10 + 0.20); ml = 4. Thus, Ml = 4($300); Ml = $1200.

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