ECON 3440 Week 2 Notes

Money Supply
CU - currency held by household and firms
D - Deposits held by HF
M - Money Supply
H - Monetary Base
RE - Reserves of Charted bank. These are the currency held by chartered banks plus the deposits of chartered banks at the central bank. rD - reserves to deposit ratio c - currency to deposit ratio rD = RE/D < 1 c = CU/D < 1
M = {(c + 1) / (c + rD) * H } m m > 1
We now want to study how the central bank can affect H and therefore M
To do this we need to understand the balance sheets of households, firms, chartered banks and the central bank
Your balance sheets lists what you own (your assets) and what you owe (your liabilities)
We will discuss only parts of the balance sheets that are relevant for the money supply process.
Balance sheet of Households and Firms
Assets
CU
D
Bonds held by HF Liabliities
Loans and Mortgages
Chartered Banks
Take-In Firms
Balance Sheet of Chartered Banks
Assets
RE
Bonds held by chartered banks Liabliities
D (Belongs to HF)
Aside
1) D is an asset for Households and Firms because they can always go to the chartered bank to ask to have them to convert it into cash.
For this reason D is also a liability for chartered banks: they are obliged to convert them into cash on demand
2) Mortgages and loans of Households and Firms are assets for chartered banks because if Households and Firms do not pay their mortgage payments, then chartered banks will take over their properties.
For this reason these mortgages and loans are liabilities for Households and Firms.
Balance Sheet of Central Bank
Assets
- Bonds held by Central Bank
- Foreign Exchange (foreign currency: gold and silver) held by Central Bank Liabliities
- CU
- Currency held by chartered banks
- Deposit of chartered banks at the central bank
(Point 2 and 3 are RE)
Effects of Central Bank
- Buying bonds from Households and Firms on stock market & pays for this with cash
- On the balance sheet of the Central Bank, CU