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.
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)
Available Formats
Download as PPTX, PDF, TXT or read online from Scribd
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)
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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
