Embed Size (px)
DESCRIPTION
Final Exam Review Macroeconomics. Econ EB222 WIN 2013 Inst. Shan A . Garib Mohawk College. Final Exam Macroeconomics. Date: Monday, April 15 th 2013 Time: 12:30pm – 2:00pm In-Class Review ALL Quizzes given in class. Consumption, Investment and the Multiplier: Chapter 9. - PowerPoint PPT Presentation
Citation preview
Final Exam ReviewMacroeconomics
Econ EB222 WIN 2013
Inst Shan A GaribMohawk College
Final Exam Macroeconomics
Date Monday April 15th 2013Time 1230pm ndash 200pm
In-Class
Review ALL Quizzes given in class
Consumption Investment and Consumption Investment and the Multiplier Chapter 9the Multiplier Chapter 9
Consumption Consumption (Continued)(Continued)
bull The consumption functions statesndashAs income rises consumption (C)
rises but not as quicklyIncome = Consuption + Saving + taxes
Y = C + S + t and Disposible Income = Consuption + Saving
Yd = C + S or Yd = Y - tTherefore consumption varies with disposable income (DI)
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
YGDP0 = $10000bn(C0) is $8600 bn MPC = 025 Note In mathematics Dx = ldquoChange inrdquo
At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
DxC = MPC x DxDI
DxDI = $9000bn - $10000bn = -$1000bn
DxC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the DxC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $650bn
9
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib WIN 2013
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Final Exam Macroeconomics
Date Monday April 15th 2013Time 1230pm ndash 200pm
In-Class
Review ALL Quizzes given in class
Consumption Investment and Consumption Investment and the Multiplier Chapter 9the Multiplier Chapter 9
Consumption Consumption (Continued)(Continued)
bull The consumption functions statesndashAs income rises consumption (C)
rises but not as quicklyIncome = Consuption + Saving + taxes
Y = C + S + t and Disposible Income = Consuption + Saving
Yd = C + S or Yd = Y - tTherefore consumption varies with disposable income (DI)
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
YGDP0 = $10000bn(C0) is $8600 bn MPC = 025 Note In mathematics Dx = ldquoChange inrdquo
At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
DxC = MPC x DxDI
DxDI = $9000bn - $10000bn = -$1000bn
DxC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the DxC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $650bn
9
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib WIN 2013
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Consumption Investment and Consumption Investment and the Multiplier Chapter 9the Multiplier Chapter 9
Consumption Consumption (Continued)(Continued)
bull The consumption functions statesndashAs income rises consumption (C)
rises but not as quicklyIncome = Consuption + Saving + taxes
Y = C + S + t and Disposible Income = Consuption + Saving
Yd = C + S or Yd = Y - tTherefore consumption varies with disposable income (DI)
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
YGDP0 = $10000bn(C0) is $8600 bn MPC = 025 Note In mathematics Dx = ldquoChange inrdquo
At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
DxC = MPC x DxDI
DxDI = $9000bn - $10000bn = -$1000bn
DxC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the DxC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $650bn
9
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib WIN 2013
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Consumption Consumption (Continued)(Continued)
bull The consumption functions statesndashAs income rises consumption (C)
rises but not as quicklyIncome = Consuption + Saving + taxes
Y = C + S + t and Disposible Income = Consuption + Saving
Yd = C + S or Yd = Y - tTherefore consumption varies with disposable income (DI)
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
YGDP0 = $10000bn(C0) is $8600 bn MPC = 025 Note In mathematics Dx = ldquoChange inrdquo
At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
DxC = MPC x DxDI
DxDI = $9000bn - $10000bn = -$1000bn
DxC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the DxC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $650bn
9
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib WIN 2013
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
YGDP0 = $10000bn(C0) is $8600 bn MPC = 025 Note In mathematics Dx = ldquoChange inrdquo
At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
DxC = MPC x DxDI
DxDI = $9000bn - $10000bn = -$1000bn
DxC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the DxC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $650bn
9
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib WIN 2013
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
YGDP0 = $10000bn(C0) is $8600 bn MPC = 025 Note In mathematics Dx = ldquoChange inrdquo
At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
DxC = MPC x DxDI
DxDI = $9000bn - $10000bn = -$1000bn
DxC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the DxC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $650bn
9
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib WIN 2013
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
YGDP0 = $10000bn(C0) is $8600 bn MPC = 025 Note In mathematics Dx = ldquoChange inrdquo
At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
DxC = MPC x DxDI
DxDI = $9000bn - $10000bn = -$1000bn
DxC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the DxC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $650bn
9
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib WIN 2013
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
YGDP0 = $10000bn(C0) is $8600 bn MPC = 025 Note In mathematics Dx = ldquoChange inrdquo
At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
DxC = MPC x DxDI
DxDI = $9000bn - $10000bn = -$1000bn
DxC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the DxC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $650bn
9
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib WIN 2013
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
9
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib WIN 2013
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recessionbull AD = C + I + G + (X-N)
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
P2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Letrsquos say there is a war and the government buys planes and guns
ldquoGrdquo goes up
b
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Letrsquos say there is a war and the half the population dies ldquoCrdquo goes down
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is when Revenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when Revenues gt Spending
0 gt Revenue ndash SpendingBudget Deficit is when Revenues lt Spending
0 lt Revenue ndash Spending
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
13
Money and the Banking SystemChapter 12
Instructor Shan A Garib WIN 2013
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Deposits you can write a check for1048707 Travelerrsquos checks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings amp time deposits2 Balances in retail money marketmutual funds3 MMDAs
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
16
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib WIN 2013
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
Scotia Bank has NO excess reservesBank of Canada purchases $10000 of bonds with a check from a man named Mr HarperMr Harper deposits this check into his account in Scotia BankNOTE If the BofC buys bonds from a chartered bank eg CIBC then there will be NO change in Demand Deposits because that money is not available to the public If the required reserve ratio (M) is 25The maximum amount of money Scotia can loan out What is the TOTAL potential change in the money supply Excess reserves = Reserves - Required Reserves
But Required Reserves = M Demand Deposits Required Reserves = 025 $10000
Required Reserves = $2500Therefore Excess reserves = Reserves - Required Reserves Excess reserves = $10000 - $2500
= $7500Resultant change in the money supply the banks can create
= 1m x Dx(Excess Reserves)
= (125) x $7500 = 4 x $7500 = $30000Then the TOTAL change in money supply is
= initial demand deposit + Dx(money supply banks can create) = $10000 + $30000 = $40000
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
BMO has $160 million of reservesThe M = 20 The Bank of Canada then lowers M to 16 How much can BMO lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
![AP Macroeconomics Exam/Course Study Guide€¦ · Web viewAP Macroeconomics Exam: Course Study Guide [ UNIT. I ] What is economics? the systematic study of choice . textbook definitions](https://img.pdfslide.us/doc/110x75/5f0746767e708231d41c2dc9/ap-macroeconomics-examcourse-study-web-view-ap-macroeconomics-exam-course-study.jpg)
