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    Money Multiplier

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    laxmi_boddu
    1) The money multiplier model shows how the money supply is determined by the monetary base, the currency-deposit ratio, and the reserve-deposit ratio. 2) During the 1930s bank failures, over 9,000 banks failed between 1929-1933, which caused the reserve-deposit ratio and currency-deposit ratio to increase. This led to a sharp fall in the money multiplier and a 28% decrease in the money supply. 3) The failure of so many banks in the 1930s demonstrates how a collapse in the money multiplier due to changes in the currency-deposit ratio and reserve-deposit ratio can cause a significant decline in the money supply and depress economic activity.

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    Money Multiplier

    Uploaded by

    laxmi_boddu
    217 views12 pages
    1) The money multiplier model shows how the money supply is determined by the monetary base, the currency-deposit ratio, and the reserve-deposit ratio. 2) During the 1930s bank failures, over 9,000 banks failed between 1929-1933, which caused the reserve-deposit ratio and currency-deposit ratio to increase. This led to a sharp fall in the money multiplier and a 28% decrease in the money supply. 3) The failure of so many banks in the 1930s demonstrates how a collapse in the money multiplier due to changes in the currency-deposit ratio and reserve-deposit ratio can cause a significant decline in the money supply and depress economic activity.

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    1) The money multiplier model shows how the money supply is determined by the monetary base, the currency-deposit ratio, and the reserve-deposit ratio. 2) During the 1930s bank failures, over 9,000 banks failed between 1929-1933, which caused the reserve-deposit ratio and currency-deposit ratio to increase. This led to a sharp fall in the money multiplier and a 28% decrease in the money supply. 3) The failure of so many banks in the 1930s demonstrates how a collapse in the money multiplier due to changes in the currency-deposit ratio and reserve-deposit ratio can cause a significant decline in the money supply and depress economic activity.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    217 views12 pages

    Money Multiplier

    Uploaded by

    laxmi_boddu
    1) The money multiplier model shows how the money supply is determined by the monetary base, the currency-deposit ratio, and the reserve-deposit ratio. 2) During the 1930s bank failures, over 9,000 banks failed between 1929-1933, which caused the reserve-deposit ratio and currency-deposit ratio to increase. This led to a sharp fall in the money multiplier and a 28% decrease in the money supply. 3) The failure of so many banks in the 1930s demonstrates how a collapse in the money multiplier due to changes in the currency-deposit ratio and reserve-deposit ratio can cause a significant decline in the money supply and depress economic activity.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 12

    Money Multiplier

    By Laxmi Narasimha Boddu

    Assumptions
    x x Depositors always leave their money in bank deposits. Individuals and banks in the aggregate always hold a certain fraction of their money in terms of currency and deposit reserves respectively. As per above assumption reserves in bank is in two forms x Reserves (R), As per regulatory body rules (RBI in India) x Excess reserves (E), available for lending.

    Definitions
    y

    Monetary Base B
    The total number of rupees held by the public as currency and by the banks as reserves B=C+R+E ------(1)

    Reserve-deposit ratio
    Reserve ratio rr = R/D Excess reserve ratio er = E/D

    Currency-deposit ratio cr
    Amount of currency C people hold as a fraction of their holdings of Demand deposit D cr = C/D

    Money M is in the form of Deposits and Currency


    M = C+D -------(2)

    Derivation
    Using equation 1 & 2
    M CD ! B CRE
    M ! B C C D D R D D D E D

    M ! B

    cr 1 cr  rr  er

    Money Multiplier
    M!
    Factor of proportionality

    1 cr cr  rr  er

    *B

    -----(3)

    cr 1 cr  rr  er

    denoted by m

    High Powered money


    y

    From Equation 1 & 3


    Each rupee of money base produces m rupees of money.

    As money base increases Money supply increases. As rr decreases Money supply increase. As cr decreases Money supply increases

    y y

    Can this single factor can cause depression in economy?

    Banks Failure and the money Supply in the 1930s


    Monetary base rose 18% y More than 9000 banks failed in between August 1929 and March 1933 y Money supply fell 28% y Money multiplier fell 38%
    y
    Reasons x Currency deposit ratio x Reserve deposit ratio

    Money supply and its determinants: 1929 and 1933


    August 1929 Money Supply Currency Demand deposits Monetary base Currency Reserves Money Multiplier Reserve-deposit ratio Currency-deposit ratio 26.5 3.9 22.6 7.1 3.9 3.2 3.7 0.14 0.17 March 1933 19.0 5.5 13.5 8.4 5.5 2.9 2.3 0.21 0.41

    Preventions
    Lender of last resort y Monetary base increase
    y

    Thank You

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