Macroeconomics Ralph Scott
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- What effect does having a few large banks have on the expansion of M as opposed to many small banks?
- The expansion of M happens faster.
- What value is given to the ratio in which people buy TD's and DD's?
- TD/DD = n
- What does the multiplier look like once we get rid of the assumption that there are no time deposits?
- 1/(r+nt)
- As we add variables and get rid of assumptions, does the multiplier grow bigger or smaller? why?
- it gets smaller, because most of the variables are in the denominator and make it bigger, therefore mathematically reducing the multiplier
- What does the multiplier look like after we do away with the assumption that WR = 0?
- you get WR in terms of DD (wDD), add it to the equation, and in the multiplier, you add w to the denominator.
- Why do we assume that people will want cash in a ratio to debt deposits?
- Because when people make money, they will deposit some and keep some. therefore, it appears as a ratio.
- What happens to the multiplier once we get rid of the assumption that cash is equal to zero? Why is it no longer a money multiplier
- We add another term, s, to the multiplier denominator. In this form, it is a DD multiplier because according to our original equation, Money is equal to DD plus cash. When Cash equals zero, the DD multiplier is the money multiplier, but once we add in a cash value thats not true anymore
- How do we find the new money multiplier?
- By going back to the original equation and plugging in sDD for cash (getting c in terms of DD). When you factor out a DD, you get (1+s)DD. Plugging in our old value for DD yields the new multiplier
- Which two of the five variables does the fed control?
- r (legal reserve requirement ratio) t (legal reserve requirement ratio on time deposits)
- Which of the three variables are out of the FED's control?
- n ( s (ratio of cash to debt deposits) w (
- In recent years, the value of t has been zero. What implications does this have for the money supply and the FED
- removing t from the multiplier means that it is no longer in the denominator. The FED is more able to control the money supply because this effectively removes one of the variables which is out of their hands.