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1、Chapter 15Multiple Deposit Creation and the Money Supply Process 2005 Pearson Education Canada Inc.Four Players in the Money Supply Process1.Central bank:the Bank of Canada2.Banks3.Depositors4.Borrowers from banksBank of Canada1.Conducts monetary policy2.Clears checks3.Regulates banks2 2005 Pearson
2、Education Canada Inc.The Banks Balance SheetBank of CanadaGovernment securitiesAdvances to banksCurrency in circulationSettlement balancesAssetsLiabilitiesMonetary Base,MB=C+R3 2005 Pearson Education Canada Inc.Control of the Monetary BaseMB=C+ROpen Market Purchase from bankThe Banking SystemThe Ban
3、k of CanadaAssetsLiabilitiesAssetsLiabilitiesSecurities$100Securities +$100Reserves +$100Reserves +$100Open Market Purchase from PublicPublic The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesSecurities$100Securities+$100Reserves+$100Deposits +$100Banking SystemAssetsLiabilitiesReservesChequable D
4、eposits+$100+$100Result:R$100,MB$1004 2005 Pearson Education Canada Inc.If Person Cashes ChequePublic The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesSecurities$100Securities+$100 Currency +$100Currency+$100Result:R unchanged,MB$100Effect on MB certain,on R uncertainThe effect of an open market
5、purchase on R depends on whether the seller of the bonds keeps the proceeds from the sale in deposits or in currency.The effect of an open market purchase on MB,however,is always the same whether the seller of the bonds keeps the proceeds from the sale in deposits or in currency.5 2005 Pearson Educa
6、tion Canada Inc.Open Market Sale of BondsMB=C+ROpen Market Sale to a bankThe Banking SystemThe Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesSecurities +$100Securities -$100Reserves -$100Reserves -$100Open Market Sale to the PublicPublic The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesSecuriti
7、es +$100Securities-$100Reserves-$100Deposits -$100Banking SystemAssetsLiabilitiesReservesChequable Deposits-$100-$100Result:R$100,MB$1006 2005 Pearson Education Canada Inc.Open Market Purchase in the Foreign Exchange(FX)MarketMB=C+ROpen Market Purchase of foreign exchange from a bankThe Banking Syst
8、emThe Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX$100FX +$100Reserves +$100Reserves +$100Open Market Purchase of foreign exchange from the PublicPublic The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX$100FX+$100Reserves+$100Deposits +$100Banking SystemAssetsLiabilitiesReservesChequable
9、Deposits+$100+$100Result:R$100,MB$1007 2005 Pearson Education Canada Inc.If Person Cashes ChequePublic The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX$100FX+$100 Currency +$100Currency+$100Result:R unchanged,MB$100Effect on MB certain,on R uncertainAgain,the effect of an open market purchase
10、on R depends on whether the seller of FX keeps the proceeds from the sale in deposits or in currency.The effect of an open market purchase of FX on MB,however,is always the same whether the seller of the FX keeps the proceeds from the sale in deposits or in currency.8 2005 Pearson Education Canada I
11、nc.Open Market Sale in the FX MarketMB=C+ROpen Market Sale of FX to a bankThe Banking SystemThe Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX +$100FX -$100Reserves -$100Reserves -$100Open Market Sale of FX to the PublicPublic The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesFX +$100FX-$100Re
12、serves-$100Deposits -$100Banking SystemAssetsLiabilitiesReservesChequable Deposits-$100-$100Result:R$100,MB$1009 2005 Pearson Education Canada Inc.Shifts from Deposits into CurrencyEven if the Bank of Canada does not conduct open market operations,a shift from deposits into currency will affect R.Ho
13、wever,such a shift will have no effect on MB.Shifts From Deposits into Currency:Public The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesDeposits$100Currency +$100Currency +$100Reserves$100Banking SystemAssetsLiabilitiesReserves$100Deposits$100Result:R$100,MB unchanged10 2005 Pearson Education Can
14、ada Inc.AdvancesBanking System The Bank of CanadaAssetsLiabilitiesAssetsLiabilitiesReserves AdvancesAdvancesReserves +$100 +$100 +$100 +$100Result:R$100,MB$100Conclusion:Bank of Canada has better ability to control MB than R11 2005 Pearson Education Canada Inc.Deposit Creation:Single BankConsider a$
15、100 open market purchase from First BankFirst BankAssets LiabilitiesSecurities$100Reserves+$100First BankAssets LiabilitiesSecurities$100Deposits+$100Reserves+$100Loans+$10012 2005 Pearson Education Canada Inc.A bank cannot safely make loans for an amount greater than the excess reserves it has befo
16、re it makes the loan.The final T-account of the First Bank (after the reserves have been withdrawn)is:First BankAssets LiabilitiesSecurities$100Loans+$10013 2005 Pearson Education Canada Inc.Deposit Creation:Banking System(r=10%)Bank AAssets LiabilitiesReserves+$100Deposits+$100Bank AAssets Liabilit
17、iesReserves+$10Deposits+$100Loans+$90Bank BAssets LiabilitiesReserves+$90Deposits+$90Bank BAssets LiabilitiesReserves+$9Deposits+$90Loans+$8114 2005 Pearson Education Canada Inc.Deposit Creation15 2005 Pearson Education Canada Inc.Banking System As a WholeBanking SystemAssets LiabilitiesSecurities$1
18、00Deposits+$1000Reserves+$100Loans+$100016 2005 Pearson Education Canada Inc.Same Result when Banks Invest their ER in Securities If the banks choose to invest their ER in securities,the result is the same.If Bank A buys securities with$90 chequeBank AAssets LiabilitiesReserves+$10Deposits+$100Secur
19、ities+$90Seller deposits$90 at Bank B and process is sameHence,whether a bank chooses to use its ER to make loans or to buy securities,the effect on deposit expansion is the same.17 2005 Pearson Education Canada Inc.Simple Deposit MultiplierSimple Deposit Multiplier1D=RrDeriving the formulaR=RR=r D1
20、D=Rr1D=Rr18 2005 Pearson Education Canada Inc.Multiple Deposit ContractionThe multiple deposit creation process should also work in reverse.When the Bank of Canada withdraws reserves from the banking system,there should be a multiple contraction of deposits.In fact,the contraction in deposits will b
21、e D=(1/r)RExample:If R=-100 and(1/r)=10 because r=.10,then D =-1000.19 2005 Pearson Education Canada Inc.Multiple Deposit Contraction:The Banking SystemBanking SystemAssets LiabilitiesSecurities+$100Deposits-$1000Reserves-$100Loans-$100020 2005 Pearson Education Canada Inc.Critique of the Simple Mod
22、elOur simple model seems to indicate that the Bank of Canada has complete control over D.It ignores,however,the fact that deposit creation stops if:1.Proceeds from loan are kept in cash(in this case nothing is deposited in Bank B,and the deposit creation process stops).In this case D =100,not 1000 w
23、e calculated earlier.2.Banks hold more reserves.If Bank A decides to hold on to all$90 of ER,no deposits would be made to Bank B,and this would also stop the deposit creation process.Again,in this case D =100,not 1000 we calculated earlier.21 2005 Pearson Education Canada Inc.ConclusionThe Bank of Canada is not the only player whose behavior influences D and M.D and M depend on:1.the publics decisions regarding how much C to hold 2.the banks decisions regarding the amount of R they wish to hold,and3.borrowers decisions on how much to borrow from banks.22 2005 Pearson Education Canada Inc.