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Money Supply and Money Demand: Macroeconomics
Money Supply and Money Demand: Macroeconomics
macroeconomics
fifth edition
N. Gregory Mankiw
PowerPoint Slides
by Ron Cronovich
With no banks,
D = 0 and M = C = $1000.
Thus, in a fractional-reserve
banking system, banks create money.
THIRDBANKS
balance sheet
Assets Liabilities
$640 deposits $640
reserves $128
loans $0
$512
C D
C D D D
cr 1
C R C D R D cr rr
cr > 0.
1. An increase in cr increases the denominator
of m proportionally more than the
numerator. So m falls, causing M to fall too.
2. If households deposit less of their money,
then banks cant make as many loans,
so the banking system wont be able to
create as much money.
1. Open
1. Openmarket
market
operations
operations
2. Reserve
2. Reserverequirements
requirements
3. The
3. Thediscount
discountrate
rate
Money
N=1
holding
s Y
Average
= Y/ 2
1 Tim
e
Money
N=2
holding
s Y
Y/ 2 Average
= Y/ 4
1/2 1 Tim
e
Money
N=3
holding
s Y
Average
Y/ 3 = Y/ 6
Given Y, i, and F,
consumer chooses N to minimize total cost
Total cost
N* N