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Money Supply and Money Demand
My goal is to present these concepts as clear as possible for your understanding.
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Quantity of Money
The number of dollars held by the public.Federal Reserve
They control the supply of money by increasing and decreasing the number of dollars in circulation through open-market operations.Money Supply
M=C+D
Money supply = Currency + Demand DepositsFinancial Intermediation
The process of transfering funds from savers to borrowers. Examples: the stock market, the bond market, and the banking system. Only banks create assets (such as checking accounts) that are part of the money supply.Loans
The creation of money by the banking system increases the economy's liquidity, not its wealth.Make an appointment
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A model of the Money Supply with 3 exogenous variables.
M = (cr + 1) / (cr + rr) x B
- Monetary base (B) is the total number of dollars held by the public as currency C and by the banks as reserves R.
- Reserve-deposit ratio (rr) is the fraction of deposits that banks hold in reserve.
- Currency-deposit ratio (cr) is the amount of currency C people hold as a fraction of their holdings of demands deposits D.
Money multiplier
m = (cr + 1) / (cr + rr)
Money multiplier is called m as (cr + 1) / (cr + rr) We can see the money supply is proportional to the monetary base.The 3 instruments of Monetary Policy.
- Open-market Operations are the purchases and sales of goverment bonds by the FED
- Reserve Requirements are FED regulations that impose on banks a minimum reserve-deposit ratio.
- Discount Rate is the interest rate that the FED charges when it makes loans to banks.
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Portfolios Theories of Money Demand
m = (cr + 1) / (cr + rr)
Theories of money demand that emphasize the role of money as a store of value are called Portfolio Theories.- People hold money as part of their portfolio of assets.
- Money offers a different combination of risk and return than other assets such as stocks and bonds.
- Some economists suggest to hold money as part of their optimal portfolio.
The Baumul-Tobin Model of Cash Management
- Analizes the costs and benefits of holding money.
- Individuals holds more money if the fixed cost of going ot the bank "F" is higher,
if expenditure "Y" is higher, or if the interest rate "i" is lower.
Average Money Holding
Average money holding = √ YF /
2i
According to Macroeconomics by Gregory Mankiw
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