Class Materials for Lecture 6

Brief Outline of Topics Covered in Lecture 6

Chapter 13 Multiple Deposit Creation and the Money Supply Process

Four Players in the Money Supply Process

The Fed’s Balance Sheet

• Liabilities
• Assets

Control of the Monetary Base

• Open Market Operations with Bank
• Open Market Operations with an Individual and shifts between Currency and Deposits

Chapter 14 Determinants of the Money Supply

The Money Supply Model and the Money Multiplier

• Deriving the Money Multiplier

Factors That Determine the Money Multiplier

• Changes in the Required Reserve Ratio, r
• Changes in the Currency Ratio, c = C/D
• Changes in the Excess Reserves Ratio, e = ER/D

Additional Factors That Determine the Money Supply

• Changes in the Nonborrowed Monetary Base, MB_n
• Changes in Borrowed Reserves, BR, from the Fed

Materials from class:

None for today

Video:

Lecture 6 [Google video] - Fall 2008

 
Lecture 6

Additional Reading:

• About the work - Paul Krugman
• Bernanke on Lehman, House Prices, More - Real Time Economics
• Kohn Sees Economic Recovery Unlikely Until Late 2009 - Real Time Economics
• Stock market wealth effects in emerging market countries - Vox EU
• Home Prices Seem Far From Bottom - NYTimes.com
• Bernanke suggests a shift at the Fed on bubble-busting - Los Angeles Times
• Panic passes but the causes remain - FT
• What will it take to shatter the glass ceiling? - Vox EU
• Everything You Need to Know About the Financial Crisis - Freakonomics
• Preemption?, Economist's View
• Bernanke See More Troubles Ahead - Real Time Economics

Application:

Bernanke Weighs Limiting Consolidation, Asset Bubbles, by Craig Torres, Bloomberg: Federal Reserve Chairman Ben S. Bernanke said the central bank will consider discarding its long- standing aversion to interfering with asset-price bubbles and warned that the banking business may be concentrated in too few companies.

Officials should review how supervision and interest rates can minimize the ''dangerous phenomenon'' of bubbles in housing, stocks and other assets that risk bringing the financial system and economy down with them when they burst, Bernanke said.

''There is no doubt that as we emerge from the current crisis that we are all going to look very hard at that issue and what can be done about it,'' he told the Economic Club of New York in his broadest remarks on future regulatory changes since the credit crisis deepened last month.

The comments signal that the 54-year-old chairman, while trying to quell the worst market turmoil since the 1930s, is crafting an agenda for greater oversight. Policy makers will toughen their response to ''excessive leverage,'' give more weight to financial stability in economic analysis and examine ways to strengthen the system of trading and settlement behind complex derivative securities, he said.

The U.S. faces ''a very serious too-big-to-fail problem,'' in which the insolvency of a large financial company could threaten a market collapse, Bernanke said in reply to an audience question. ''There are too many firms that are in some sense systemically critical.''

Government efforts to calm financial markets and stem the credit crisis probably won't result in an immediate economic rebound, Bernanke said.

''Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,'' Bernanke said in his speech. ''Economic activity will fall short of potential for a time.''

''The housing market continues to be a primary source of weakness in the real economy as well as in the financial markets, and we have seen marked slowdowns in consumer spending, business investment and the labor market,'' Bernanke said. ''Credit markets will take some time to unfreeze.''

The Fed said today in a regional review of the economy that growth deteriorated throughout the U.S. last month and pessimism about the outlook spread.

''Economic activity weakened in September across all 12 Federal Reserve districts,'' the Fed said in its Beige Book report. ''Consumer spending decreased in most districts, with declines reported in retailing, auto sales and tourism.''

Bernanke has pushed the limits of the Fed's authority to create several unprecedented lending channels. Still, damage from the credit crisis has spread from mortgage lenders, commercial banks, securities firms and the biggest U.S. insurer to companies involved in manufacturing and services. ...

U.S. central bankers have used some five new programs, many erected under emergency powers, to pump billions in temporary dollar loans into a financial system where many banks have curtailed overnight lending out of concern they won't be paid back.

''Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning,'' Bernanke said. ...

''Americans can be confident that every resource is being brought to bear to address the current crisis,'' Bernanke said. ''We now have the tools we need to respond.''