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Money and The Banking System
Money and The Banking System
M1
The narrowly defined money supply,usually abbreviated M1 , is the sum of all coins and paper money in circulation,plus certain checkable deposit balances at banks and savings institutions
M2
The broadly defined money supply,usually abbreviated M2,is the sum of all coins and paper money in circulation,plus all types of checking account balances,plus most forms of saving account balances,plus shares in money market mutual funds
Bank Regulation
Deposit insurance Bank supervision Rreserve requirement
1 + + 2 + 3 + . . . =
1 1
R = common ratio
Money multiplier is the ratio of newly created bank deposits to new reserves
If individuals and business firms decide to hold more cash ,the multiple expansion of bank deposits will be curtailed because fewer dollars of cash will be available for use as reserves to support checking deposits.consequently,the money supply will be smaller If banks wish to keep excess reserves,the multiple expansion of bank deposits will be restricted. A given amount of cash will support a smaller supply of money than would be the case if banks held no excess reserves