Transcript Bank One
MACROECONOMICS BU 204 Seminar Eight Agenda Course Issues and Questions Chapter 13 & 14 Concepts and Q&A Where are we going next? Deposit Creation: Banking System Assets Reserves Assets Reserves Loans Assets Reserves Assets Reserves Loans + $100 + $10 + $90 + $90 +$9 + $81 Fleet Bank Liabilities Deposits + $100 Fleet Bank Liabilities Deposits + $100 Bank One Liabilities Deposits + $90 Bank One Liabilities Deposits + $90 Deposit Creation Creation of Deposits (assuming 10% Reserve Requirement and $100 increase in reserves) Bank Manhattan Commercial Increase in Deposits Increase in Loans Increase in Reserves 0.00 100.00 0.00 Fleet Bank 100.00 90.00 10.00 Bank One 90.00 81.00 9.00 Bank A 81.00 72.90 8.10 Bank B 72.90 65.61 7.29 Bank C 65.61 59.05 6.56 Bank D 59.05 53.14 5.91 . . . . . . . . . . . . 1000.00 1000.00 100.00 Total For All Banks Note: These lecture notes are incomplete without having attended lectures Change in the money supply Change in prices, real GDP, & employment Keynesian Change in interest rates Policy Change in the aggregate demand curve Change in investment Money Prices MV = PQ Velocity Quantity Change in the quantity of money Change in prices, real GDP, & employment Monetarist Change in the money Policy supply Change in the aggregate demand curve Macroeconomics BU204 Homework: In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%. 1. Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table. (Hint: The first row shows that the bank must hold $100 in minimum reserves—20% of the $500 deposit—against this deposit, leaving $400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in currency, only $400 × 0.5 = $200 of the loan will be deposited in round 2 from the loan granted in round 1.) Macroeconomics BU204 Round Deposits 1 $500.00 2 $200.00 3 4 5 6 7 8 9 10 totals Required reserves $100.00 Excess reserves $400.00 Loans $400.00 Loan proceeds held as currency $200.00 Loan proceeds deposited $200.00 2. How does your answer compare to an economy in which the total amount of the loan is deposited in the banking system and the public doesn’t hold any of the loans in currency? (Hint: Do another table with none of the loan proceeds held in currency.) 3. What does this imply about the relationship between the public’s desire for holding currency and the money multiplier? a. An economy in a hypothetical country is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary—will the economy face after the shock, and what type of fiscal policies, giving specific examples, would help move the economy back to potential output? a.A stock market boom increases the value of stocks held by households (8 points). b.Firms come to believe that a recession in the near future is likely (8 points). c. Anticipating the possibility of war, the government increases its purchases of military equipment (8 points). d.The quantity of money in the economy declines and interest rates increase (8 points). Macroeconomics Questions?