The document summarizes the credit money creation process through commercial banks. It shows how an initial deposit of $5 million at Bank A leads to $25 million in total deposits across the banking system through loans being redeposited and the process repeating. The money multiplier of 1/required reserve ratio is used to calculate this derived deposit amount. Some limitations of this simple model are also discussed, such as cash leakage and excess reserves held by banks.
This document discusses the balance of payments (BOP) of a country. It defines BOP as a systematic record of all economic transactions between a country and the rest of the world over a period of time, usually annually. It notes that the BOP has two components - the current account, which covers visible and invisible trade, and the capital account, which covers financial transactions like investments. A country experiences a BOP surplus if it receives more foreign currency than it spends, and a deficit if it spends more than it receives. It also discusses factors that can cause BOP disequilibria and measures governments can take to address BOP deficits.
The document discusses monetary policy and its objectives and tools. The objectives of monetary policy are to ensure economic stability, achieve price stability by controlling inflation and deflation, and promote economic growth. The key tools of monetary policy are quantitative measures like open market operations, cash reserve ratio, and discount rate. Qualitative measures include credit rationing, changing lending margins, moral suasion, and direct controls. Monetary policy uses various tools to contract the money supply and credit to control inflation or expand the money supply and credit to control recession.
Corrective measures of BOP disequilibriumKunthavai ..
To correct a balance of payments deficit, a country has monetary and trade measures available. Monetary measures include deflation, devaluation, exchange rates, and exchange depreciation. Trade measures involve export promotions and import controls such as quotas. Deflation lowers prices to make exports cheaper abroad. Devaluation reduces the value of the home currency to boost exports and curb imports. Quotas limit the quantity of goods that can be imported to reduce the deficit and improve the balance of payments.
This document discusses monetary policy, including:
- Monetary policy is primarily concerned with interest rates and money supply and is carried out by central banks.
- There are two types of monetary policy - expansionary and contractionary. Contractionary policy raises rates to reduce inflation while expansionary lowers rates to boost the economy.
- The objectives of monetary policy are to manage inflation and reduce unemployment, with inflation being the primary target. Central banks use various tools like interest rates, securities purchases and requirements to implement monetary policy.
The document discusses various aspects of bank management and balance sheets. It begins by providing an overview of topics that will be covered, including the bank balance sheet, basics of banking, general principles of bank management, off-balance sheet activities, and measuring bank performance. It then examines the bank balance sheet in more detail, exploring assets such as reserves, loans, and securities, as well as liabilities including deposits and borrowings. The document also discusses the basics of banking through T-account analyses of deposits and reserves. Finally, it outlines some general principles of bank management, focusing on liquidity management, asset management, liability management, and capital adequacy.
Econ315 Money and Banking: Learning Unit 22: Money Supply Process (2014)sakanor
This document explains how the Federal Reserve controls the money supply through managing the monetary base and the reserve balances of commercial banks. It discusses the Fed's tools of open market operations and discount window lending, and how these tools work to increase or decrease the monetary base and bank reserves. It also introduces the concept of the money multiplier, where an initial change to bank reserves through Fed operations can ultimately result in a larger change to the total money supply through the process of multiple deposit creation.
The document provides an overview of finance including definitions, categories, functions, goals, principles, and key concepts such as interest rates, cost of equity, and the term structure of interest rates. Finance is defined as the management of money, and involves how firms raise capital, invest for profit, and decide whether to reinvest or distribute profits. The categories of finance discussed are personal, corporate, and public finance. Key principles covered include risk-return tradeoff, time value of money, and diversification. Methods for calculating cost of equity such as dividend yield and CAPM are also summarized.
This document discusses money supply and the banking system. It defines different measures of money supply (M1, M2, M3, M4) and explains how money is created through the banking system. Banks act as intermediaries that accept deposits and create money through lending. This expands the money supply through the money multiplier process. The money supply is determined by factors like public behavior, commercial bank behavior, and central bank influence. The money market reaches equilibrium where the demand for money equals the supply.
This document discusses the balance of payments (BOP) of a country. It defines BOP as a systematic record of all economic transactions between a country and the rest of the world over a period of time, usually annually. It notes that the BOP has two components - the current account, which covers visible and invisible trade, and the capital account, which covers financial transactions like investments. A country experiences a BOP surplus if it receives more foreign currency than it spends, and a deficit if it spends more than it receives. It also discusses factors that can cause BOP disequilibria and measures governments can take to address BOP deficits.
The document discusses monetary policy and its objectives and tools. The objectives of monetary policy are to ensure economic stability, achieve price stability by controlling inflation and deflation, and promote economic growth. The key tools of monetary policy are quantitative measures like open market operations, cash reserve ratio, and discount rate. Qualitative measures include credit rationing, changing lending margins, moral suasion, and direct controls. Monetary policy uses various tools to contract the money supply and credit to control inflation or expand the money supply and credit to control recession.
Corrective measures of BOP disequilibriumKunthavai ..
To correct a balance of payments deficit, a country has monetary and trade measures available. Monetary measures include deflation, devaluation, exchange rates, and exchange depreciation. Trade measures involve export promotions and import controls such as quotas. Deflation lowers prices to make exports cheaper abroad. Devaluation reduces the value of the home currency to boost exports and curb imports. Quotas limit the quantity of goods that can be imported to reduce the deficit and improve the balance of payments.
This document discusses monetary policy, including:
- Monetary policy is primarily concerned with interest rates and money supply and is carried out by central banks.
- There are two types of monetary policy - expansionary and contractionary. Contractionary policy raises rates to reduce inflation while expansionary lowers rates to boost the economy.
- The objectives of monetary policy are to manage inflation and reduce unemployment, with inflation being the primary target. Central banks use various tools like interest rates, securities purchases and requirements to implement monetary policy.
The document discusses various aspects of bank management and balance sheets. It begins by providing an overview of topics that will be covered, including the bank balance sheet, basics of banking, general principles of bank management, off-balance sheet activities, and measuring bank performance. It then examines the bank balance sheet in more detail, exploring assets such as reserves, loans, and securities, as well as liabilities including deposits and borrowings. The document also discusses the basics of banking through T-account analyses of deposits and reserves. Finally, it outlines some general principles of bank management, focusing on liquidity management, asset management, liability management, and capital adequacy.
Econ315 Money and Banking: Learning Unit 22: Money Supply Process (2014)sakanor
This document explains how the Federal Reserve controls the money supply through managing the monetary base and the reserve balances of commercial banks. It discusses the Fed's tools of open market operations and discount window lending, and how these tools work to increase or decrease the monetary base and bank reserves. It also introduces the concept of the money multiplier, where an initial change to bank reserves through Fed operations can ultimately result in a larger change to the total money supply through the process of multiple deposit creation.
The document provides an overview of finance including definitions, categories, functions, goals, principles, and key concepts such as interest rates, cost of equity, and the term structure of interest rates. Finance is defined as the management of money, and involves how firms raise capital, invest for profit, and decide whether to reinvest or distribute profits. The categories of finance discussed are personal, corporate, and public finance. Key principles covered include risk-return tradeoff, time value of money, and diversification. Methods for calculating cost of equity such as dividend yield and CAPM are also summarized.
This document discusses money supply and the banking system. It defines different measures of money supply (M1, M2, M3, M4) and explains how money is created through the banking system. Banks act as intermediaries that accept deposits and create money through lending. This expands the money supply through the money multiplier process. The money supply is determined by factors like public behavior, commercial bank behavior, and central bank influence. The money market reaches equilibrium where the demand for money equals the supply.
This document discusses measures of the money supply (M1 and M2) and how banks create money through the money multiplier effect. It explains that the money supply expands as banks make loans from their excess reserves. The money multiplier is equal to 1 divided by the required reserve ratio, so in this example the money multiplier is 10. When the Fed conducts open market operations by buying bonds, it increases bank reserves and allows the money supply to expand through additional lending. The Fed uses tools like open market operations, reserve requirements, and interest rates to influence the money supply and control monetary policy.
Financial Literacy for Financial Inclusion, Egypt Case. Presented by Ms. Mona el Baradei at the United Nations 23 May 2014, during "A Chance for Change" co-hosted by Child & Youth Finance International and UNCDF. #CYFI2014 #UNforYouth
Chapter18 International Finance ManagementPiyush Gaur
Dorchester Ltd is considering building a new manufacturing plant in the US to expand its candy production and sales in North America. The initial cost of the plant would be $7 million. Local debt financing of $1.5 million at 7.75% interest would be provided. Dorchester must decide whether to issue additional debt in pounds sterling at 10.75% or US dollars at 9.5%.
Building the new plant would allow Dorchester to serve the entire North American market and realize higher profits of $4.40 per pound sold. However, the analysis of costs, revenues, tax rates, debt financing, and exchange rates is complex given the international dimensions. A full capital budgeting analysis is required to
Behavioural Economics content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class.
Subtopics:
Alternative Views of Consumer Behaviour
Behavioural Biases
Nudges
Multinational corporations play a major role in India by providing foreign capital, investment, and jobs. They help solve problems of lack of capital and foreign exchange through investments in factories, offices, and production facilities. This increases trade and integration of markets. MNCs also help local producers reach global markets. They spread production activities across countries by designing products in one, manufacturing in another with lower costs, and providing customer support from locations like India with skilled labor. MNCs bring benefits like higher wages, lower prices, technology transfer, and stimulus for domestic investment. Their growth is due to advantages in size, finances, technology, marketing, and research and development globally.
The document provides an overview of a country's balance of payments (BOP). It discusses the key components of the BOP including the current account, capital account, and reserve account. The current account records trade flows and investment income, while the capital account records flows of financial capital. Together these must net to zero according to the BOP identity. A country's BOP data can provide insights into competitiveness and capital flows over time. Monetary and fiscal policies can impact BOP components and exchange rates through their effects on growth, inflation, and interest rates.
An interest rate is the cost of borrowing money expressed as a percentage of the total amount borrowed. Interest rates are not directly determined by supply and demand but are indirectly set by the Reserve Bank of Australia through its impact on the cash rate. There are different types of interest rates depending on whether an institution is borrowing or lending funds and the term of the financial assets. Factors like the demand for capital goods, savings levels, inflation expectations, and international rates can affect general interest rate levels in Australia. The Reserve Bank uses domestic market operations like buying and selling government securities to influence the cash rate and monetary policy.
This document discusses international financial flows and the balance of payments. It defines the balance of payments as a summary of all economic transactions between a country and the rest of the world over a period of time. The balance of payments has two main components - the current account, which tracks trade in goods/services and income flows, and the capital account, which covers investment-related flows. The document outlines several factors that influence international trade volumes and patterns, such as trade agreements, outsourcing, and relative labor costs across countries.
Monetary policy refers to actions taken by central banks to control money supply and influence interest rates in order to achieve objectives like price stability and economic growth. There are two types: expansionary monetary policy stimulates the economy by increasing money supply and lowering interest rates, while contractionary policy decreases money supply to reduce inflation by making money less accessible. Central banks use instruments like adjusting interest rates, buying and selling government bonds, and changing bank reserve requirements to implement monetary policy and meet its objectives of full employment, economic growth, price stability, and more.
The document summarizes key concepts relating to open economy macroeconomics and balance of payments (BOP) accounting. It defines an open economy as one that engages in transactions with other countries, and notes that BOP records these transactions in goods, services, assets and transfers. It outlines the main components of BOP - the current account, capital account, financial account, and reserves and related assets. It provides examples of items included in each account and explains their purpose in tracking an economy's international transactions.
This document provides an overview of financial regulation and its economic rationale. It discusses how government safety nets like deposit insurance can create moral hazard issues but are still necessary to prevent bank runs. It also describes different types of financial regulation, including restrictions on asset holdings, capital requirements, disclosure requirements, consumer protection laws, and international coordination challenges. The goal of regulation is to reduce asymmetric information problems while not unduly limiting competition.
The balance of a payment is a systematic record of all its monetary transections with other countries of the world in a given period of time. i.e 1 year
This chapter discusses interest rates and their role in valuation. It defines key terms like yield to maturity and explains how to calculate interest rates for different debt instruments. It also distinguishes between nominal interest rates and real interest rates after adjusting for inflation. Finally, it discusses the relationship between interest rates and investment returns and how duration measures the sensitivity of prices to interest rate changes.
finance account banks business banker acceptance open account international financial management slide Factoring Forfeiting counter trade Definition example method of settling payment for trade transactions 2014
Barter.Counter-purchase.Buyback.
Slides Jeff Otto recently used in his discussion w/ mentees of The Product Mentor.
The Product Mentor is a program designed to pair Product Mentors and Mentees from around the World, across all industries, from start-up to enterprise, guided by the fundamental goals…Better Decisions. Better Products. Better Product People.
Throughout the program, each mentor leads a conversation in an area of their expertise that is live streamed and available to both mentee and the broader product community.
http://TheProductMentor.com
This chapter discusses fixed exchange rates and foreign exchange intervention by central banks. It covers why fixed exchange rates are studied, how central banks intervene in currency markets to maintain fixed rates, the effects on monetary policy and economic stabilization, and risks of balance of payments crises. It also examines reserve currencies, gold standards, and the implications of different international monetary systems.
The document discusses investment decision making and capital budgeting. It describes the process of project analysis, feasibility study, financial appraisal, capital budgeting, and capital rationing. The key steps are analyzing potential projects, conducting technical, market, economic, and financial feasibility studies, using tools like NPV, IRR, and payback period for financial appraisal, developing a capital budget, and rationing capital among projects when funds are limited. An example demonstrates ranking projects based on NPV and allocating capital in order of ranking until the funds are exhausted.
The document discusses the definitions and components of money supply. It defines money as a medium of exchange, unit of account, store of value, and standard for deferred payments. It then outlines the different measures of money supply - M1, M2, M3, and M4. The rest of the document discusses the role and functions of central banks, monetary policy tools and their transmission mechanisms, balance sheet of a commercial bank, and concepts related to money multiplier and money supply.
The document discusses factors that determine the money supply and the money multiplier. It defines the monetary base (MB) as currency in circulation plus reserves, and M1 as currency plus checkable deposits. The money multiplier relates these, with M1 equal to the multiplier times MB. The multiplier depends on the currency ratio, reserve ratio, and excess reserves ratio. Changes in these ratios, such as due to bank panics, can impact the money supply by altering the multiplier. The Fed has more control over MB than M1 due to additional influencing factors.
This document discusses measures of the money supply (M1 and M2) and how banks create money through the money multiplier effect. It explains that the money supply expands as banks make loans from their excess reserves. The money multiplier is equal to 1 divided by the required reserve ratio, so in this example the money multiplier is 10. When the Fed conducts open market operations by buying bonds, it increases bank reserves and allows the money supply to expand through additional lending. The Fed uses tools like open market operations, reserve requirements, and interest rates to influence the money supply and control monetary policy.
Financial Literacy for Financial Inclusion, Egypt Case. Presented by Ms. Mona el Baradei at the United Nations 23 May 2014, during "A Chance for Change" co-hosted by Child & Youth Finance International and UNCDF. #CYFI2014 #UNforYouth
Chapter18 International Finance ManagementPiyush Gaur
Dorchester Ltd is considering building a new manufacturing plant in the US to expand its candy production and sales in North America. The initial cost of the plant would be $7 million. Local debt financing of $1.5 million at 7.75% interest would be provided. Dorchester must decide whether to issue additional debt in pounds sterling at 10.75% or US dollars at 9.5%.
Building the new plant would allow Dorchester to serve the entire North American market and realize higher profits of $4.40 per pound sold. However, the analysis of costs, revenues, tax rates, debt financing, and exchange rates is complex given the international dimensions. A full capital budgeting analysis is required to
Behavioural Economics content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class.
Subtopics:
Alternative Views of Consumer Behaviour
Behavioural Biases
Nudges
Multinational corporations play a major role in India by providing foreign capital, investment, and jobs. They help solve problems of lack of capital and foreign exchange through investments in factories, offices, and production facilities. This increases trade and integration of markets. MNCs also help local producers reach global markets. They spread production activities across countries by designing products in one, manufacturing in another with lower costs, and providing customer support from locations like India with skilled labor. MNCs bring benefits like higher wages, lower prices, technology transfer, and stimulus for domestic investment. Their growth is due to advantages in size, finances, technology, marketing, and research and development globally.
The document provides an overview of a country's balance of payments (BOP). It discusses the key components of the BOP including the current account, capital account, and reserve account. The current account records trade flows and investment income, while the capital account records flows of financial capital. Together these must net to zero according to the BOP identity. A country's BOP data can provide insights into competitiveness and capital flows over time. Monetary and fiscal policies can impact BOP components and exchange rates through their effects on growth, inflation, and interest rates.
An interest rate is the cost of borrowing money expressed as a percentage of the total amount borrowed. Interest rates are not directly determined by supply and demand but are indirectly set by the Reserve Bank of Australia through its impact on the cash rate. There are different types of interest rates depending on whether an institution is borrowing or lending funds and the term of the financial assets. Factors like the demand for capital goods, savings levels, inflation expectations, and international rates can affect general interest rate levels in Australia. The Reserve Bank uses domestic market operations like buying and selling government securities to influence the cash rate and monetary policy.
This document discusses international financial flows and the balance of payments. It defines the balance of payments as a summary of all economic transactions between a country and the rest of the world over a period of time. The balance of payments has two main components - the current account, which tracks trade in goods/services and income flows, and the capital account, which covers investment-related flows. The document outlines several factors that influence international trade volumes and patterns, such as trade agreements, outsourcing, and relative labor costs across countries.
Monetary policy refers to actions taken by central banks to control money supply and influence interest rates in order to achieve objectives like price stability and economic growth. There are two types: expansionary monetary policy stimulates the economy by increasing money supply and lowering interest rates, while contractionary policy decreases money supply to reduce inflation by making money less accessible. Central banks use instruments like adjusting interest rates, buying and selling government bonds, and changing bank reserve requirements to implement monetary policy and meet its objectives of full employment, economic growth, price stability, and more.
The document summarizes key concepts relating to open economy macroeconomics and balance of payments (BOP) accounting. It defines an open economy as one that engages in transactions with other countries, and notes that BOP records these transactions in goods, services, assets and transfers. It outlines the main components of BOP - the current account, capital account, financial account, and reserves and related assets. It provides examples of items included in each account and explains their purpose in tracking an economy's international transactions.
This document provides an overview of financial regulation and its economic rationale. It discusses how government safety nets like deposit insurance can create moral hazard issues but are still necessary to prevent bank runs. It also describes different types of financial regulation, including restrictions on asset holdings, capital requirements, disclosure requirements, consumer protection laws, and international coordination challenges. The goal of regulation is to reduce asymmetric information problems while not unduly limiting competition.
The balance of a payment is a systematic record of all its monetary transections with other countries of the world in a given period of time. i.e 1 year
This chapter discusses interest rates and their role in valuation. It defines key terms like yield to maturity and explains how to calculate interest rates for different debt instruments. It also distinguishes between nominal interest rates and real interest rates after adjusting for inflation. Finally, it discusses the relationship between interest rates and investment returns and how duration measures the sensitivity of prices to interest rate changes.
finance account banks business banker acceptance open account international financial management slide Factoring Forfeiting counter trade Definition example method of settling payment for trade transactions 2014
Barter.Counter-purchase.Buyback.
Slides Jeff Otto recently used in his discussion w/ mentees of The Product Mentor.
The Product Mentor is a program designed to pair Product Mentors and Mentees from around the World, across all industries, from start-up to enterprise, guided by the fundamental goals…Better Decisions. Better Products. Better Product People.
Throughout the program, each mentor leads a conversation in an area of their expertise that is live streamed and available to both mentee and the broader product community.
http://TheProductMentor.com
This chapter discusses fixed exchange rates and foreign exchange intervention by central banks. It covers why fixed exchange rates are studied, how central banks intervene in currency markets to maintain fixed rates, the effects on monetary policy and economic stabilization, and risks of balance of payments crises. It also examines reserve currencies, gold standards, and the implications of different international monetary systems.
The document discusses investment decision making and capital budgeting. It describes the process of project analysis, feasibility study, financial appraisal, capital budgeting, and capital rationing. The key steps are analyzing potential projects, conducting technical, market, economic, and financial feasibility studies, using tools like NPV, IRR, and payback period for financial appraisal, developing a capital budget, and rationing capital among projects when funds are limited. An example demonstrates ranking projects based on NPV and allocating capital in order of ranking until the funds are exhausted.
The document discusses the definitions and components of money supply. It defines money as a medium of exchange, unit of account, store of value, and standard for deferred payments. It then outlines the different measures of money supply - M1, M2, M3, and M4. The rest of the document discusses the role and functions of central banks, monetary policy tools and their transmission mechanisms, balance sheet of a commercial bank, and concepts related to money multiplier and money supply.
The document discusses factors that determine the money supply and the money multiplier. It defines the monetary base (MB) as currency in circulation plus reserves, and M1 as currency plus checkable deposits. The money multiplier relates these, with M1 equal to the multiplier times MB. The multiplier depends on the currency ratio, reserve ratio, and excess reserves ratio. Changes in these ratios, such as due to bank panics, can impact the money supply by altering the multiplier. The Fed has more control over MB than M1 due to additional influencing factors.
The document discusses money supply and monetary policy. It defines the three players that influence money supply as the central bank (Federal Reserve), banks, and depositors. It explains how the Federal Reserve uses open market operations and changes in reserve requirements to influence the monetary base and money supply. The money multiplier formula is derived, showing how the monetary base is multiplied into the money supply through the banking system. Factors like currency holdings, excess reserves, and borrowing can influence the money multiplier.
- The document discusses factors that influence the money supply, including the central bank (Federal Reserve), banks, and depositors.
- It describes how the Federal Reserve uses open market operations and changes in reserve requirements to influence the monetary base and money supply.
- The money multiplier formula is derived, showing how the monetary base is multiplied into the money supply through the banking system.
The document discusses concepts related to measuring money supply and determining money supply. It defines several monetary aggregates (M1-M4, NM0-NM3, L1-L3) used in India to measure money supply. It then presents a general model of money creation where money supply is determined by the monetary base, currency to deposit ratio, required reserve ratio, and excess reserve ratio. Changes in these determinants by the central bank, commercial banks, or public can impact money supply. The document also discusses exogenous and endogenous views of how the money supply curve may be shaped.
Narrow banking with modern depository institutions: Is there a reason to pani...ADEMU_Project
What are the effects of narrow banking? This paper includes a realistic description of how modern monetary systems radically change the predictions of the traditional model.
The document discusses the monetary system in India. It defines money and its functions. It explains the different measures of money supply in India and the role of the Reserve Bank of India in managing the monetary system. It discusses how banks create money through fractional-reserve banking and the money multiplier effect. It also outlines the instruments used by RBI to control money supply such as bank rate, CRR, SLR etc.
The document discusses how fractional-reserve banking allows banks to create money through the money multiplier effect. It provides scenarios to illustrate this, showing how an original $1000 deposit can expand the money supply to $5000 through loans made by multiple banks. It also covers theories of money demand, how the Federal Reserve uses tools like open market operations and reserve requirements to influence the money supply, and reasons why the Fed cannot precisely control the money supply.
Monetary policy uses tools like interest rates, reserve requirements, and open market operations to influence the money supply and shift the aggregate demand curve to achieve goals like economic growth and stable prices. Banks create money through fractional reserve banking by lending out deposits while holding only a portion as reserves, multiplying the original money supply. However, monetary policy faces limitations when interest rates hit zero and the economy is already at full employment, as further stimulus only causes inflation without increasing output.
Money supply is determined by the central bank and commercial banking network. It impacts macroeconomic conditions and interest rates. There are four measures of money supply but M3, which includes time deposits and savings deposits, is most widely used. Factors like bank credit, government spending, and foreign exchange reserves can increase money supply. While central banks can print money, uncontrolled printing will devalue the currency. Commercial banks create credit through the deposit multiplier process, where an initial deposit can expand into multiple new deposits through a series of loans and redeposits, limited by reserve requirements.
"The Seniority Structure of Sovereign Debt" by Christoph Trebesch, Matthias S...ADEMU_Project
1) The document analyzes the seniority structure of sovereign debt using data on debt arrears and debt restructuring haircuts from 1980-2006.
2) It finds that official creditors like the IMF and World Bank tend to be more senior than other creditors like bilateral or commercial banks based on lower levels of arrears and haircuts.
3) However, bondholders appear to have equal or higher seniority than official creditors based on analyses of arrears and haircut data during debt crises.
Chapter 24_Risk Management in Financial InstitutionsRusman Mukhlis
This document summarizes techniques for managing credit risk and interest rate risk at financial institutions. It discusses screening, monitoring and specializing in lending to manage credit risk. It then introduces income gap analysis and duration gap analysis to measure interest rate risk exposure and impact on income and capital. Strategies discussed to manage interest rate risk include shortening asset duration, lengthening liability duration, and immunizing the balance sheet by setting the duration gap to zero.
The document summarizes key concepts related to money supply and demand. It discusses:
1) How the central bank (Federal Reserve) controls money supply through tools like required reserve ratios, discount rates, and open market operations.
2) How fractional reserve banking allows banks to lend excess reserves and multiply the money supply.
3) The relationship between money supply (M) and monetary base (B), and how the money multiplier determines changes to the money supply.
4) Factors that influence demand for money, such as personal income, interest rates, expected inflation, and real wealth.
5) How the central bank uses monetary policy to target interest rates and stabilize the economy.
The document discusses the money supply and banking system. It defines money and its key functions as a medium of exchange, store of value, and unit of account. It then explains how commercial banks create money through the fractional reserve system, and how the money multiplier amplifies changes in the money supply. The Federal Reserve uses three main tools to influence the money supply - adjusting required reserve ratios, changing the discount rate, and conducting open market operations through buying and selling government securities.
The document discusses several key topics related to money and banking:
1) It outlines the functions of money as a medium of exchange, unit of account, and store of value.
2) It describes how the banking system works, including the roles of central banks, high-powered money, reserve ratios, and how the money multiplier determines money supply.
3) It presents models for the demand for money based on transactions, precautionary, and asset motives as well as the relationship between money demand and interest rates.
1. The document discusses net present value and the time value of money. It introduces concepts like future value, present value, discount rates, and compounding interest.
2. Examples are provided to illustrate how to calculate the net present value of projects using future and present cash flows. A positive net present value indicates the project should be accepted.
3. The concepts of perpetuities, annuities, and multiperiod cash flows are explained. Consumer preferences and budget constraints over time are also covered.
Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
The demand for an asset rises if ________ falls. 1)
A)
risk relative to other assets B) wealth C) expected return relative to other assets D) liquidity relative to other assets
2)
Banks' attempts to solve adverse selection and moral hazard problems help explain loan 2) management principles such as A) credit rationing.
B)
collateral and compensating balances.
C)
screening and monitoring of loan applicants.
D)
all of the above.
E)
only A and B of the above.
3)
When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate 3) or even a higher rate, it is said to engage in ________.
A)
credit rationing B) constrained lending C) strategic refusal D) collusive behavior
4)
If a bank has more rate
-
sensitive liabilities than rate
-
sensitive assets, then a(n) ________ in interest 4) rates will ________ bank profits.
A)
increase; increase B) increase; reduce
C) decline; not affect D) decline; reduce
First National Bank
Assets Liabilities
Rate
-
sensitive Fixed
-
rate
$20 million $50 million
$80 million $40 million
Table 23.1
5)
Referring to Table 23.1, if interest rates rise by 5 percentage points, then bank profits (measured 5) using gap analysis) will
A)
increase by $1.5 million. B) decline by $0.5 million.
C) decline by $2.5 million. D) decline by $1.5 million.
First National Bank
Assets Liabilities
Rate
-
sensitive Fixed
-
rate
$40 million $50 million
$60 million $40 million
Table 23.2
6) Refer to Table 23.2. Assuming that the average duration of the bank's assets is four years, while the average duration of its liabilities is three years, a rise in interest rates from 5 percent to 10 percent will cause the net worth of First National to ________ by ________ of the total original asset value.
A) decline; 6.2% B) increase; 5% C) decline; 5% D) decline; 1.3%
6)
7)
Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for 7) several maturity subintervals by the change in the interest rate is called A) basic gap analysis.
B)
the maturity bucket approach to gap analysis.
C)
the segmented maturity approach to interest
-
exposure analysis.
D)
the segmented maturity approach to gap analysis.
E)
none of the above.
8)
If a decline in interest rates causes the market value of a bank's net worth to rise, then the bank 8) must have a ________.
A) positive duration gap B) positive gap
C) negative duration gap ...
Discounted cash flow valuation uses present value calculations to determine the value of investment projects and companies. It discounts future cash flows back to the present using a discount rate. The net present value (NPV) of a project is calculated by taking the present value of all expected future cash flows. A positive NPV means the project adds value while a negative NPV means it destroys value. Proper valuation requires forecasting cash flows, determining the appropriate discount rate, and discounting the cash flows to get the NPV.
The document defines key terms related to money and banking such as banks, financial markets, monetary theory, inflation, interest rates, and balance sheets. It provides examples to illustrate bank balance sheets and how transactions impact reserves. The central bank plays an essential role as the lender of last resort, implements monetary policy, and controls credit and cash availability. The central bank uses tools like open market operations, reserve requirements, and interest rates to influence the money supply. Money functions as a medium of exchange, store of value, unit of account, and measure of value in an economy.
Similar to Deposit Money Creation of commercial banks and its Determinants (20)
Discover the Future of Dogecoin with Our Comprehensive Guidance36 Crypto
Learn in-depth about Dogecoin's trajectory and stay informed with 36crypto's essential and up-to-date information about the crypto space.
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Deposit Money Creation of commercial banks and its Determinants
1.
2. Credit money creation process:
Simplified Assumptions:
• All economic transactions are carried out through the banking
system. Thus, the new legal money remains inside the banks
and does not leak out of the banking system.
• The commercial bank is committed only to the mandatory
reserve ratio (required reserve (rd)) determined by the central
bank.
• One of the commercial banks (A) has received a current
(demand) deposit of (5) million dollars.
3. This bank will keep the required reserve ratio (rd) and lend
the rest of the deposit.
Assume that (rd) is 20%, then Bank (A) will keep 1
million dollars as a required reserve and lend the rest to its
customers.
RR = rd x Dd = 0.20 x 5,000,000 = $ 1,000,000
Then, the balance sheet of Bank (A) is:
Assets (million) Liabilities (million)
Required Reserves
Loans
1
4
Demand deposit 5
Total 5 Total 5
4. The money that Bank (A) lent to one of its clients (4 million
dollars) will be disposed of by this client to pay his
obligations.
Assuming that there is no cash leakage outside the banking
system, the other person will deposit this amount with Bank
(B) as a current deposit.
Bank (B) will do the same process that Bank (A) did before.
Bank (B) will keep 20% x 4,000,000 = $ 800,000 as a
required reserve and lend $ 3,200,000 to its customers.
5. This process will be repeated several times and each time the
Bank will keep 20% of this deposit as a required reserve and
lends the rest which can be illustrated by this simplified table:
Assets (million) Liabilities (million)
Required Reserves
Loans
0.8
3.2
Demand deposit 4
Total 4 Total 4
The balance sheet of Bank (B)
7. The total demand deposits that commercial banks can collectively
create from the original deposit can be calculated by:
Dd = (1/rd) E
E the size of the initial (real) deposit.
Dd = (1/0.20) x 5 = $ 25 million
The total deposits derived from this process is the difference between
the total demand deposits and the original (initial) deposit:
Total derived deposits = 25 - 5 = $ 20 million.
The required reserves of commercial banks RR are:
RR = rd x Dd = 0.20 x 25 = $ 5 million.
8. Simple Money Multiplier:
The deposit creation multiplier = (1/rd).
In the previous example, the simple money multiplier = 1/rd = 1/0.20 = 5.
This means that an initial deposit of 5 million dollars created five times this
deposit in the national economy.
The total demand deposits are divided into two types: real deposits of (5)
million dollars, and derived deposits of (25 - 5 = 20) million dollars.
Accordingly, commercial banks can collectively create demand deposits to
(20) million dollars to use in its credit activity.
Derived Deposits = Real Deposits [(1 ÷ rd) – 1]
Derived Deposits = 5 [(1 ÷ 0.20) – 1]
= 5 [5 - 1] = 5 x 4 = $ 20 million.
9. Drawbacks of the simple money multiplier:
The simple multiplier assumes that people deposit all their money in
banks without any cash leakage outside the banking system, and this
matter is not accurate as people usually deposit part of their income in
banks, and the other part they keep as liquidity.
This liquidity ratio is called the ratio of the currency in circulation (c).
c = C/Dd
The simple multiplier assumes that banks are lending all the deposits they
have after deducting the required reserve ratio. But in fact, the
commercial banks usually keep a percentage greater than the required
reserve (Excess Reserves) (ER).
These constraints limit the ability of commercial banks to create credit.
10. Limitations of the Deposit Creation Process:
The first model: The case of current deposits
In this form we will discuss the case of only current deposits with
no time deposits (the narrow concept of money supply M1)
M1 = C + Dd
We first will discuss the money multiplier in case of cash leakage
outside the banking system without excess reserves and in the next
step we will add excess reserves in our analysis.
11. Case (1): Cash leakage
The monetary base (MB) refers to the sum of money
issued by the central bank which includes the
currency in circulation with individuals in addition to
the reserves held by commercial banks.
MB = C + RR (in case of no excess reserves)
The money multiplier (m1) measures the maximum
amount of deposit money that commercial banks can
create by a given unit of the monetary base.
M1 = m1 MB
12. The money multiplier (m1) can be derived through these
steps:
Assuming that c is the ratio of the currency in circulation to
the total demand deposits
c = C/Dd
The monetary base can be expressed by:
MB = C + RR = c Dd + rd Dd
MB = (c + rd) Dd
13. The total demand deposits with can be expressed by:
The currency in circulation:
Then, M1 money supply is given by:
M1 = C + Dd
The money multiplier (m1) is represented by:
14. The money multiplier is affected by two main factors, (rd, c).
If there is no cash leakage outside the banking system (c =
0), in this case we arrive at the simple money multiplier
(1/rd).
Case (2): excess reserves
If we include the excess reserves in our analysis, we get:
TR = RR + ER (Total reserves)
e = ER/Dd (The ratio of excess reserves)
15. TR = rd Dd + e Dd
The monetary base can be expressed by:
MB = C + TR = c Dd + rd Dd + e Dd
MB = (c + rd + e) Dd
The total demand deposits can be calculated based on the
monetary base by:
16. The currency in circulation is calculated based on the
monetary base by:
Then, the money supply (M1) can be calculated based on the
monetary base by: M1 = C + Dd
Then, the money multiplier (m1) is given by:
17. Factors Affecting Money Supply (M1):
Factors affecting the money supply M1 are the monetary base, the
required reserve ratio, excess reserves, and the rate of leakage
outside the banking system.
1- The Monetary base (MB):
• An increase in the monetary base leads to an increase in the ability
of commercial banks to expand bank loans provided that this
increase in the monetary base is used in the lending process and
does not go to increasing excess reserves or to the currency in
circulation with individuals.
18. 2- The required reserve ratio (rd):
• A decrease in rd increases the money multiplier and thus the
ability of commercial banks to expand granting loans.
3- Ratio of currency in circulation (c):
• Increasing the ratio of currency in circulation means this money
goes out of the money creation process and thus negatively affects
the money multiplier and money supply.
4- Excess reserves ratio:
• Increasing excess reserves ratio negatively affects the money
multiplier and thus the ability of commercial banks to grant credit.
19. • Example (1):
• Assuming that rd = 10%, the amount of currency in circulation is
$400 billion, the total demand deposits are $800 billion, and the
excess reserves are $8 billion.
• Thus, M1 is calculated as follows:
M1 = C + Dd = 400 + 800 = $ 1200 billion
• The cash leakage ratio is:
c = C/Dd = 400/800 = 0.5
• This ratio means that individuals tend to keep 50% of their money
in cash outside the banking system.
20. • The ratio of excess reserves is:
e = ER/Dd = 8/800 = 0.01
• This means that commercial banks tend to hold 1% of deposits as
additional reserves.
• The money multiplier (m1) is:
which means that a $1 increase in the size of the monetary base
leads to a $2.46 increase in the money supply (M1).
21. • Example (2):
• Assuming an increase in the rd from 10% to 15%. In this
case, the money multiplier is:
• An increase of rd leads to a decrease of m1 (inverse
relationship)
22. • Example (3):
• Assuming that the rd = 10%, but the ratio of the currency in
circulation increased to 75%, in this case m1 is:
• Higher ratio of currency in circulation leads to lower money
multiplier (an inverse relationship).
23. • Example (4):
• Assuming that the proportion of excess reserves increased
from 1% to 5%. In this case, the m1 is:
• An increase in the excess reserve ratio leads to a decrease in
the money multiplier (an inverse relationship)
24. The second model: The case of time deposits
• The money supply equation (M2) :
M2 = C + Dd + Td + MMF
Where:
C: Currency in circulation outside the banking system.
Dd: Current (demand) deposits.
Td: Time and savings deposits.
MMF: Mutual funds and money market deposits.
25. • Total required reserves consist of:
RR = rd Dd + rt Td
• The monetary base: (in case of no excess reserves)
MB = RR + C = rd Dd + rt Td + C
• The money supply (M2) equation:
M2 = C + Dd +Td + MMF
26. • The money multiplier for broad money supply (m2) is :
m2 = M2/MB
27. • In the case of excess reserves, m2 is:
Example (5):
Assuming that rd = 20%, rt = 10%, C = $100 million, Dd =
$400 million, ER = $10 million, Td = $900 million, and
MMF = $800 million. Calculate the money multiplier (m2)
and the money supply (M2).
28. • The solution:
M2 = C + Dd + Td + MMF
= 100 + 400 + 900 + 800 = $ 2200 million.
The money supply multiplier (m2) is:
This means that an increase in the monetary base by one dollar
leads to an increase in the money supply (M2) by $7.857.
29. Determinants of Money Multiplier (m2)
The money multiplier (m2) depends on:
• The required reserve ratio for demand deposit (rd).
• The required reserve ratio for time deposit (rt).
• Ratio of currency in circulation (c).
• Excess reserve ratio (e).
• The ratio of time deposits to demand deposits (Td/Dd)
• The ratio of mutual funds to demand deposits (MMF/Dd).
30. Exercises:
1) Assuming that the total demand deposits are 100 Billion dollars,
and the required reserve ratio for demand deposits (rd) is 20%,
the cash leakage ratio (c) is 25%.
a) Calculate money in circulation outside the banking system.
b) Calculate the monetary base MB
c) Calculate the money supply M1
d) Calculate the total demand deposits, Dd, (using monetary base
form)
e) Calculate the volume of currency in circulation, C (using
monetary base form)
31. f) Calculate M1 money supply (using monetary base form)
g) Calculate the money multiplier m1.
h) Assuming that the central bank wants to increase the money
supply M1 by 20 billion dollars, what is the required increase in the
monetary base to achieve this?
i) Assuming that commercial banks keep additional reserves by 10
billion dollars, what is the impact of this on the money multiplier
m1, and what is your explanation for that?
j) Assuming that the percentage of the currency in circulation
increased to 30%, what is the effect of this on the money multiplier
m1 and the money supply M1?
32. 2) Assuming that the size of the monetary base is 42 billion dollars,
the volume of currency in circulation is 30 billion dollars, the
required reserve ratio for current deposits is 15%, and the
volume of demand deposits is 60 billion dollars, the ratio of time
deposits to demand deposits is 50%, the required reserve ratio
for time deposits (rt) is 10%, and the money mutual funds are $5
billion. Then calculate:
a) The amount of time deposits.
b) Total reserves.
c) The percentage of currency in circulation.
33. d) The narrow money supply M1.
e) The broad money supply M2.
f) The multiplier of broad money supply m2.
g) Assuming that there are additional reserves at the
commercial banks e = 0.10, what is the effect of this on the
money supply multiplier m2?