The money multiplier is 1/required reserve ratio = 1/0.25 = 4
A $1,000 decrease in excess reserves by the Fed would cause a $4,000 decrease in the money supply based on the money multiplier formula. The answer is c.
Financial markets and their impact on economyShivkumar Menon
Financial Markets - This deck captures the movement of Money markets and Capital Markets, its impact on different stakeholders viz. Individuals, businesses, markets and the economy
central bank is the father of all banks, main regulatory body of the nation which control and regulate all the banks of the country. central bank is the financial advisor to the government.
Jimmy Vercellino, an experienced professional with mortgage lender First Choice Loan Services, works hard to provide a personalized home loan process for you. Options include FHA and VA loans, fixed / adjustable rate mortgages, Jumbo loans and more. Visit http://phxhomeloan.com
First Choice Loan Services Inc.
7600 E. Doubletree Ranch Road #200
Scottsdale, AZ 85258
480-800-8387
jimmy@phxhomeloan.com
Financial markets and their impact on economyShivkumar Menon
Financial Markets - This deck captures the movement of Money markets and Capital Markets, its impact on different stakeholders viz. Individuals, businesses, markets and the economy
central bank is the father of all banks, main regulatory body of the nation which control and regulate all the banks of the country. central bank is the financial advisor to the government.
Jimmy Vercellino, an experienced professional with mortgage lender First Choice Loan Services, works hard to provide a personalized home loan process for you. Options include FHA and VA loans, fixed / adjustable rate mortgages, Jumbo loans and more. Visit http://phxhomeloan.com
First Choice Loan Services Inc.
7600 E. Doubletree Ranch Road #200
Scottsdale, AZ 85258
480-800-8387
jimmy@phxhomeloan.com
Credit Creation With Modern and Fresh Look.This PPt tells about the method of Credit Creation.I think this will help you a lot.I have made possible to enhance the look this will increase your impression in front of your classmates,business partners and your seniors.Thanks :-)
Lecture slides for an undergraduate course on Basic Macroeconomics that I taught in the Fall of 2007.
This lecture focuses on (US-centric) monetary policy.
MODERN MONEY: The way a sovereign currency “works”DevinDSmith
Presentation by L. Randall Wray at the conference: Central Banks, Financial Systems, and Economic Development, Banco Central de la Republica Argentina in Buenos Aires, Argentina on 10/2/2012
1. One of the functions of money is that it is a ‘store of value’..docxSusanaFurman449
1. One of the functions of money is that it is a ‘store of value’. Explain
2. What is the difference between fiat money and a credit card?
3. How do commercial banks maximize their stockholders’ wealth?
4. The Federal Reserve System (the Fed) is the central bank of the United States. What are its primary functions?
5. Assume that the US economy is experiencing a rather severe recession. How might the Fed utilize the discount rate to speed up the economy? Explain in detail.
6. Assume that the US economy is experiencing a rather severe recession. How might the Fed utilize open market operations to speed up the economy (use lecture notes to answer this)? Explain in detail.
7. Using the explanation in the lecture, explain how the Fed’s purchase of bonds (securities) on the open market can not only increase the money supply through banks’ lending but also decrease the EFFECTIVE interest rate for borrowers. Use an example with actual interest rates.
8. Explain how the required reserve requirement can be used by the Fed to either expand or contract the money supply.
9. A) Using the formula given in the lecture, calculate how much the money supply would increase given an injection of $10 million with a required reserve ratio of 5%. B) Given the same data, how much would the money supply decrease if $10 million were taken out of the money supply with a 5% required reserve ratio?.
10. What 3 events turned an ordinary recession in 1929 into the Great Depression?
11. Ironically technological advancements have made bartering, which used to be an extremely inefficient exchange of values, more and more popular in the present day. Think of and identify four situations where present-day bartering becomes beneficial to both sides of the transaction.
12. Assume that you have 100 $1 bills. Assume also that I have 4 $100 bills. Explain why even though you have more paper money (100 pieces of paper), the value of my four pieces of paper is greater than yours.
13. The Federal Reserve can in effect expand or contract the supply of money in the US.
a. Explain what you think the Fed must do to expand the money supply.
b. Identify 2 reasons why the Fed would do this.
14. Is it possible that the Fed, since it supposedly acts independently of the US government, could use monetary policies (expanding or contracting the money supply) in order to benefit only the wealthiest corporations and individuals while ignoring the lower classes? Explain your opinion here in detail.
15. Explain your opinion as to whether you feel that using a central bank (the Fed) to control all of the US’s major monetary policies as well as all of its money is dangerous? What might be some of the unintended consequences of giving this much power to one private entity?
Module 7 Lecture (Ch. 18): Money and the Monetary System
What Is Money?
The answer seems simple enough, yet there are some false illusions as to what is and what is not money. Basically, money is anything that is commonly accept.
TUI University 1Money and Monetary PolicyMacroeconomic.docxwillcoxjanay
TUI University 1
Money and Monetary Policy
Macroeconomics
ECO202
TUI University
TUI University 2
•Forms and Types of Money:
People invented money to overcome the limitations
of barter.
Early money was “commodity money.”
Commodity monies are items used as money that
also have intrinsic use value.
People invented fiat money and credit money to
overcome the limitations of commodity money.
Why do fiat money and credit money have value?
TUI University 3
Functions of Money:
Money regardless of form performs three
important functions in the economy.
Money serves as:
1. Medium of Exchange.
2. Store of Value.
3. Standard of Value.
TUI University 4
1. Medium of Exchange:
Barter requires the double coincidence of wants.
Money lowers the transactions costs of exchange
by serving as the means of payment.
TUI University 5
2. Store of Value:
Money is a convenient way to store part of one’s
wealth.
Any asset has three important features.
An advantage to money is its liquidity, but liquidity
has an opportunity cost.
During inflationary times it is dangerous to store
wealth in the form of money.
TUI University 6
Risk and Return:
The rate of return on an asset is the total dollar
gain from an asset measured as a % from the
beginning of the period.
The return combines any income with a capital
gain or loss.
Risk measures the variability of returns.
TUI University 7
3. Standard of Value:
Unit of account.
Money is a standard of value for quoting prices.
TUI University 8
M1:
Narrow transactions money supply is
called “M1.”
M1= currency + demand deposits
(checking accounts) + traveler's checks.
M1 is currently around 1.1 Trillion $ and
often falling.
About 60% of M1 is demand deposits and
a about 40% is currency.
TUI University 9
M2:
Broad money.
M2 includes M1 + liquid assets.
M2 = M1 + smaller savings accounts + small time
deposit accounts + money market accounts + other
near monies.
M2 is about 4.5 T $.
The relationship between M2 and the economy broke
down in the early 1990’s as people pulled money out
of savings accounts and put it into financial
investments outside of banks that are not included in
the money supply.
M2 is no longer a target variable of the Fed.
TUI University 10
CURRENCY IN THE ECONOMY
$372 billion of currency amounts to over $1,430 for every
man, woman and child in the U.S.
Most of the currency in the official statistics is not used in
ordinary commerce in the U.S.
Much is held abroad by wealthy people
Some circulates in other countries along with local
currencies
Currency is also used in illegal transactions
TUI University 11
BANKS AS FINANCIAL
INTERMEDIARIES
Help bring savers and investors together
By using expertise and powers of diversification, financial
intermediaries reduce risk to savers and allow investors
to obtain funds on better terms
A typical commercial bank accepts funds from savers in the ...
The Federal Reserve and Money SupplyTakes s.docxcherry686017
The Federal Reserve and Money Supply
*
Takes sections for chapters 10, 14, & 15 from the Mishkin text (9th edition), Federal Reserve reader, and www.federalreserve.gov
Chpt 10
3 key players
1. Depositors
2. Banks
3. Federal Reserve
Depositors are the most important providers of funds and they are the biggest users of fundsIf depositors lose confidence bank runs can occur, causing banks to lose their sources of funds If depositors have confidence banks have an increase amount of funds
Banks are the keepers of depositors funds
As before our deposits are their biggest liabilities, but their greatest assets
Balance Sheet is the most important document to understand the banking system
It is made up of two broad categories
Liabilities (Sources of Funds)
Assets (Uses of Funds)
Listed from most liquid to least liquid
Liabilities are simply the sources of funds
Checkable deposits
Payable on demand
Considered to be an asset for depositor (us)
Lowest cost of sources for banks we want easy access to liquidity
Only 6% of total liabilities (per the Fed)
Nontransaction deposits
CDs
Owners cannot write checks against such accounts
Primary source of bank funds (53% of bank liabilities)
Checkable deposits intterest paid on deposits has accounted for 25% of total bank operating expenses while the costs involved in servicing accounts (employee salaries, building, rent) has roughly 50% of operating expenses!
Liabilities Cont.
Discount Loans / Fed Fund (31% of liabilities)
Discount loans are loans from the Federal Reserve (also known as advances)
Typically 1%-pt above the fed funds rate
Banks typically do not want to borrow from the Fed unless absolutely necessary!
Fed Funds loan (overnight loans)
Federal funds are overnight borrowings by banks to maintain their bank reserves at the Federal Reserve
Transactions in the federal funds market allow banks with excess reserve balances to lend reserves to banks with deficient reserves
These loans are usually made for one day only (‘overnight’).
Bank Capital (10% of liabilities)
Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions.
Typically referred to as the uses of fundsThe interest payments earned on them are what enable banks to make profits.
Reserve Requirements
These are deposits plus currency that is physically held by banks.
Reserves are made up by required reserves and excess reserves
Required Reserves: For every dollar of checkable deposits at a bank (a fraction must be kept as reserves)
Excess Reserves: The most liquid of all bank assets and the bank can use them to make other loans to banks (through the fed funds market) or other loans.
Cash Items in Collection Process
Checks in process of being cleared from another bank
Correspondent banking
Common in small banks
Small banks hold deposits in larger banks in exchange for a variety of services, including check collection, foreign exchange tran ...
2. In this chapter, you will
learn to solve these
economic puzzles:
Exactly how is money the
What are is there nothing
Why thethe economy?
created in
major tools
Federal Reserve uses to
‘federal’ about the
That is, supply of money?
how does the
control the funds rate?
federal
money supply increase?
2
3. In the Middle Ages, what
was used for Money?
Gold was the money
of choice in most
European nations
3
4. Who were the
Founders of our
Modern-day Banking?
Goldsmiths, people
who would keep other
people’s gold safe for
a service charge
4
5. What was the first
Currency?
People would use the
receipts they received from
goldsmiths as paper money
5
6. How did the early
Goldsmiths act as the
First Banks?
Some goldsmiths made
loans and received
interest for more gold
than the actual gold held
in their vaults
6
7. What is Fractional
Reserve Banking?
A system in which banks
keep only a percentage
of their deposits on
reserve as vault cash and
deposits at the Fed
7
8. What are
Required Reserves?
The minimum balance that
the Fed requires a bank to
hold in vault cash or on
deposit with the Fed
8
9. What is a
Required Reserve Ratio?
The percentage of deposits
that the Fed requires a
bank to hold in vault cash
or on deposit with the Fed
9
10. What are
Excess Reserves?
Potential loan balances held
in vault cash or on deposit
with the Fed in excess of
required reserves
10
11. Typical Bank - Balance Sheet 1
Assets Liabilities
Required $5 million Checkable $50 million
Reserves Deposits
Excess 0
Reserves
Loans $45 million
Total $50 million Total $50 million
Note: The Fed requires the bank to keep
10% of its checkable deposits in reserve.
11
12. What are
Total Reserves?
Total Reserves = required
reserves + excess reserves
12
13. Required Reserve Ratio of the Fed
Required Reserve
Type of Deposit
Ratio
Checkable deposits
0 - $46.5 million 3%
Over $46.5 million 10%
Source: Federal Reserve Bulletin,
April 1999, Table 1.15, p. A8
13
14. Best National Bank - Balance Sheet 2
Assets Liabilities ∆ in M1
Required $10,000 Brad Rich $100,000 0
Reserves Account
Excess
Reserves +$90,000
Total $100,000 Total $100,000
Note: The Fed requires the bank to keep
10% of its checkable deposits in reserve.
14
15. Best National Bank - Balance Sheet 3
Assets Liabilities ∆ in M1
Required $19,000 Brad Rich $100,000
Reserves Account
Excess $81,000 Connie Jones +$90,000
Reserves Account $90,000
Loans +$90,000
Total $190,000 Total $190,000
Note: The Fed requires the bank to keep
10% of its checkable deposits in reserve.
15
16. Best National Bank - Balance Sheet 4
Assets Liabilities ∆ in M1
Required $10,000 Brad Rich $100,000 0
Reserves Account
Excess 0 Connie Jones 0
Reserves Account
Loans $90,000
Total $100,000 $100,000
Note: The Fed requires the bank to keep
10% of its checkable deposits in reserve.
16
17. Yazoo Bank - Balance Sheet 5
Assets Liabilities
Required +$9,000 Better Health +$90,000
Reserves Span Account
Excess +$81,000
Reserves
Total $90,000 Total $90,000
Note: The Fed requires the bank to keep
10% of its checkable deposits in reserve.
17
18. Expansion of the Money Supply
Increase in Increase in
Increase in
# Bank Deposits Required
Reserves
Excess
Reserves
1 Best Nat’l Bank $100,000 $10,000 $90,000
2 Yazoo Nat’l Bank 90,000 9,000 81,000
3 Bank A 81,000 8,100 72,900
4 Bank B 72,900 7,290 65,610
5 Bank C 65,610 6,561 59,049
6 Bank D 59,049 5,905 53,144
7 Bank E 53,144 5,314 47,830
Total all other banks 478,297 47,830 430,467
Total increase $1,000,000 $100,000 $900,000
18
19. What is the
Money Multiplier?
The maximum change in the
money supply due to an
initial change in the excess
reserves banks hold
19
20. What is the Money
Multiplier equal to?
1 / required reserve ratio
20
21. Actual money supply change
∆ M1 = ∆ER x m
Initial change in excess reserves
Money multiplier
21
22. Can the Multiplier be
smaller than indicated?
Yes, because of cash
leakages and the chance
that banks will not use
all of their excess
reserves to make loans
22
23. What would the Fed do if
we had Inflation?
Decrease the money supply
What would the Fed do if
we had unemployment?
Increase the money supply
23
24. What is Monetary Policy?
The Fed’s use of -
• open market operations
∀∆ in discount rate
∀∆ in required reserve
ratio
24
25. What are Open
Market Operations?
The buying and selling of
government securities by
the Federal Reserve System
25
26. Federal Reserve System - Balance Sheet 6
Assets Liabilities
Government Fed notes
securities $472 $492
Loans to banks Deposits 34
1
Other liabilities
Other assets 75 and net worth 22
Total $548 Total $548
Source: Federal Reserve Bulletin, April 1999, Table 1.18, p. A10
26
27. Federal Reserve Bank - Balance Sheet 7
Assets Liabilities Initial ∆
in M1
Government +$100,000 Reserves of +$100,000 +$100,000
securities Best Nat’l
bank
Note: The Fed conducted open market
operations in order to increase the
money supply by purchasing $100,000
in government securities.
27
28. Federal Reserve Bank - Balance Sheet 8
Assets Liabilities Initial ∆
in M1
Government -$100,000 Reserves of -$100,000 -$100,000
securities Best Nat’l
bank
Note: The Fed conducted open market
operations in order to decrease the
money supply by selling $100,000 in
government securities.
28
29. Fed
Fed buys government
Fed sells government $ $
securities and banks
securities and banks gain reserves
loose reserves
Banks
$
$
Public
29
30. What is the
Discount Rate?
The interest rate the
Fed charges on loans
of reserves to banks
30
31. What would the Fed do if
we have Inflation?
A higher discount rate
discourages banks from
borrowing reserves and
making loans
31
32. What would the Fed do if
we have Unemployment?
A lower discount rate
encourages banks to
borrow reserves and
make more loans
32
33. What is the Federal
Funds Market?
A private market in
which banks lend
reserves to each other
for less than 24 hours
33
34. What is the Federal
Funds Rate?
The interest rate banks
charge for overnight
loans to other banks
34
35. What would the Fed do if
we had Inflation?
A higher federal funds rate
discourages banks from
borrowing reserves and
making loans
35
36. What would the Fed do if
we had Unemployment?
A lower federal funds
rate encourages banks
to borrow reserves and
make more loans
36
37. What is a Required
Reserve Requirement?
The Fed determines how
much a financial
institution must keep in
reserve as a percentage of
its total assets
37
38. What is the Required
Reserve Ratio?
That percentage the Fed
stipulates that financial
institutions must keep in
reserve to meet its
reserve requirement
38
39. If the Reserve Ratio
is one tenth, what is
the multiplier?
1 ÷ 1/10 = 10
39
40. If the Reserve Ratio is
one twentieth, what is
the multiplier?
1 ÷ 1/20 = 20
40
41. What would the Fed do
if we had Inflation?
Increase the reserve ratio
What would the Fed do if
we had Unemployment?
Decrease the reserve ratio
41
42. Is changing the Reserve
Ratio a popular
Monetary Tool?
No, changing the reserve
ratio is considered a heavy-
handed approach and is
thus infrequently used
42
43. What are the
Shortcomings of
Monetary Policy?
• Money multiplier inaccuracy
• Nonbanks
• Which money definition
should the Fed control?
• Lag effects
43
45. Key Concepts
• Who were the Founders of our Modern-day Ba
• What is Fractional Reserve Banking?
• What are Required Reserves?
• What is a Required Reserve Ratio?
• What are Excess Reserves?
• What are Total Reserves?
• What is the Money Multiplier?
• What is the Money Multiplier equal to?
45
46. Key Concepts cont.
• What is Monetary Policy?
• What are Open Market Operations?
• What is the Discount Rate?
• What is the Federal Funds Rate?
• What is a Required Reserve Requirement?
• What is the Required Reserve Ratio?
• What are the Shortcomings of Monetary
Policy?
46
48. Fractional reserve banking, the
basis of banking today, originated
with the goldsmiths in the Middle
Ages. Because depository institutions
(banks) are not required to keep all
their deposits in vault cash or with the
Federal Reserve, banks create money
by making loans.
48
49. Required reserves are the
minimum balance that the Fed
requires a bank to hold in vault
cash or on deposit with the Fed.
The percentage of deposits that
must be held as required reserves
is called the required reserve ratio.
49
50. Excess reserves exist when a
bank has more reserves than
required. Excess reserves allow a
bank to create money by exchanging
loans for deposits. Money is reduced
when excess reserves are reduced
and loans are repaid.
50
51. The money multiplier is used to
calculate the maximum change
(positive or negative) in checkable
deposits (money supply) due to a
change in excess reserves. As a
formula:
$ multiplier = 1/required reserve ratio.
51
52. Monetary policy is action
taken by the Fed to change the
money supply. The Fed uses three
basic tools: (1) open market
operations, (2) changes in the
discount rate and (3) changes in
the required reserve ratio.
52
53. Open-market operations are the
buying and selling of government
securities by the Fed through its
trading desk at the New York
Federal Reserve Bank. Buying
government securities creates extra
bank reserves and loans, thereby
expanding the money supply.
Selling government securities
reduces bank reserves and loans,
thereby contracting the money
supply. 53
54. Fed
Fed buys government
Fed sells government $ $
securities and banks
securities and banks gain reserves
loose reserves
Banks
$
$
Public
54
55. Changes in the discount rate occur
when the Fed changes the rate of
interest it charges on loans of reserves
to banks. Dropping the discount rate
makes it easier for banks to borrow
reserves from the Fed and expands the
money supply. Raising the discount rate
discourages banks from borrowing
reserves from the Fed and contracts the
money supply.
55
56. Changes in the required reserve
ratio and the size of the money
multiplier are inversely related. Thus, if
the Fed decreases the required reserve
ratio the money multiplier and money
supply increase. If the Fed increases the
required reserve ratio the money
multiplier and money supply decrease.
56
57. Monetary policy limitations include
the following: (1) The money multiplier
can vary. (2) Nonbanks, such as
insurance companies, finance
companies, and Sears, can offer loans
and other financial services not directly
under the Fed’s control. (3) The Fed
might control M1 while the public can
shift funds to M2, M3, or another
money supply definition. (4) Time lags
occur.
57
59. 1. If a bank has total deposits of $100,000
with $10,000 set aside to meet reserve
requirements of the Fed, its required
reserve ratio is
a. $10,000.
b. 10 percent.
c. 0.1 percent.
d. 1 percent.
B. Required reserve ratio = required
deposits ÷ total deposits x 100 =
$10,000 ÷ $100,000 x 100
59
60. 2. Assume a simplified banking system in which
all banks are subject to a uniform required
reserve ratio of 30 percent and demand
deposits are the only form of money. A bank
that receives a new deposit of $10,000 is able to
extend new loans up to a maximum of
a. $3,000.
b. $7,000.
c. $10,000.
d. $30,000.
B. Excess reserves can be loaned. Excess reserves
= total reserves - required reserves = $10,000 -
(0.3 x $10,000) = $10,000 - $3,000 = $7,000
60
61. 3. The Best National Bank operates with a 10
percent required reserve ratio. One day a
depositor withdraws $400 from his or her
checking account at the bank. As a result, the
bank’s excess reserves
a. fall by $400.
b. fall by $360.
c. fall by $40.
d. rise by $400.
B. Excess reserves = total reserves -
required reserves = -$400 - (0.10 x $400)
= -$400 + $40 = -$360
61
62. 4. If an increase of $100 in excess reserves in
a simplified banking system can lead to a
total expansion in bank deposits of $400,
the required reserve ratio must be
a. 40 percent.
b. 400 percent.
c. 25 percent.
d. 4 percent.
e. 2.5 percent.
C. $ multiplier = ∆ in bank deposits ÷
initial ∆ in excess reserves = 400 ÷ $100
= 4 = 1 ÷ required reserve ratio = 1 ÷
money multiplier x 100.
62
63. 5. In a simplified banking system in which all
banks are subject to a 25% required reserve
ratio, a $1,000 open sale by the Fed would
cause the money supply to
a. increase by $1,000.
b. decrease by $1,000.
c. decrease by $4,000.
d. increase by $4,000.
C. Money supply change (∆ M1) = initial ∆ in
excess reserves x money multiplier (MM).
MM = 1 ÷ required reserve ratio = 1 ÷ 25/100 =
4.
∆ M1 = $1,000 x 4 = -$4,000.
63
64. 6. In a simplified banking system in which all
banks are subject to a 20% required reserve
ratio, a $1,000 open market purchase by the
Fed would cause the money supply to
a. increase by $100.
b. decrease by $200.
c. decrease by $5,000.
d. increase by $5,000.
D. Money supply change (∆ M1) = initial
change in excess reserves x money
multiplier (MM)
MM = 1 ÷ required reserve ratio = 1 ÷ 20/100
=5
∆ M1 = $1,000 x 5 = $5,000.
64
65. 7. The cost to a member bank of borrowing
from the Federal Reserve is measured by the
a. reserve requirement.
b. price of securities in the open market.
c. discount rate.
d. yield on government bonds.
C. The Fed provides a discount window at each
of the Federal Reserve districts banks to
make loans of reserves to banks and change
an interest rate called the discount rate.
65
66. Exhibit 5
Balance Sheet of Best National Bank
Assets Liabilities
$ Checkable $100,000
Required Reserves
deposits
Excess Reserves
Loans 80,000
Total $100,000 Total $100,000
66
67. 8. The required reserve ratio in Exhibit 5 is
a. 10%.
b. 15%.
c. 20%.
d. 25%.
C. Excess reserves = total reserves -
required reserves = $80,000 = $100,000 -
required reserves = $20,000
Required reserve ratio = required deposits
÷ total deposits = $20,000 ÷ $100,000 x
100 = 20%
67
68. 9. If the bank in Exhibit 5 received $100,000 in
new deposits, its new required reserves would
be
a. $10,000.
b. $20,000.
c. $30,000.
d. $40,000.
B. Required reserves = required reserve ratio
x new deposits = .20 x $100,000 = $20,000
68
69. 10. Suppose Brad Jones deposits $1,000 in the
bank shown in Exhibit 5. The result would
be
a. a $200 increase in excess reserves.
b. a $200 increase in required reserves.
c. a $1,200 increase in required reserves.
d. zero change in required reserves.
B. Required reserves = required reserve
ratio x new deposits = .20 x $1,000 = $200
69
70. 11. If all banks in the system are identical to
Best National Bank in Exhibit 5. A $1,000
open market sale by the Fed would
a. 5.
b. 10.
c. 15.
d. 20.
A. Money multiplier = 1 ÷ required
reserve ratio = 1 ÷ 20/100 = 5
70
71. 12. Assume all banks in the system are identical
to Best National Bank in Exhibit 5. A $1,000
open market sale by the Fed would
a. expand the money supply by $1,000.
b. expand the money supply by $15,000.
c. contract the money supply by $1,000.
d. contract the money supply by $5,000.
D. Money supply change (∆ M1) = initial
change in excess reserves x money
multiplier (MM)
MM = 1 ÷ required reserve ratio = 1 ÷ 20/100
=5
∆ M1 = $1,000 x 5 = -$5,000.
71
72. Internet Exercises
Click on the picture of the book,
choose updates by chapter for
the latest internet exercises
72