Money multiplier, Microeconomics

The Money Multiplier is explained below:

If you see carefully, the money multiplier is nothing but an inverse of a reserve ratio. Therefore, we can write MM = 1/rr, where rr is the reserve ratio. Usually, in stock terms we can write down, M2 = MM*M0 = (1/rr)*M0; and in flow terms we can write, ΔM2 = (1/rr)*ΔM0. The higher the reserve ratio, the higher will be the leakage, so to speak, from money creation process and so the lower the money multiplier. In the extreme case, when rr = 100%, MM is 1, and M2 = M0.

To complete our understanding of money supply process let us now zoom in on central bank’s balance sheet. To keep things easy, we’ll consider the balance sheet of State Bank of Nepal, SBN, abstracting from more complicated ones held by the U.S. Federal Reserve Bank, the European Central Bank or the Bank of England. The choice of SBN is, however, for illustration purposes only and this does not reflect on SBN’s actual financials.

 

 

 

 

 

 

Posted Date: 7/19/2012 4:11:21 AM | Location : United States







Related Discussions:- Money multiplier, Assignment Help, Ask Question on Money multiplier, Get Answer, Expert's Help, Money multiplier Discussions

Write discussion on Money multiplier
Your posts are moderated
Related Questions

Assume that the market equilibrium rent for two-bedroom apartments in Santa Monica, California is $1500 per month and the quantity is 40,000 units. The city council of Santa Monica

1. Isoquants are negatively sloped because if the quantity of factor 1 used in production is decreased then the quantity of the other factor must be increased to produce the s

Q. What do you meant by Enclosures? Enclosures: A historic process in Britain and other European countries, in very early years of capitalism, in that lands formerly held and u

Joe is the owner-operator of Joe’s Haircuts Unlimited. Last year he earned $100,000 in total revenues and paid $65,000 to his employees and suppliers. During the course

Ask questA rmuses 4 inputs to produce 1 output. The production function is f (x 1 ; x 2 ; x 3 ; x 4) =minfx 1 ; x 2 g + minfx 3 ; x 4 g.ion #Minimum 100 words accepted#


Much of the supply-side, fiscally conservative economic policies of Margaret Thatcher, Ronald Reagan, and even Mike Harris in Ontario were predicated on the belief that high income

Asian Crisis: Between 1997-98, several of the East Asian tiger economies suffered a severe economic and financial crisis. it had big consequences in the global financial markets, t

The Cost Minimizing Input Choice - Assumptions Two Inputs: Labor (L) & capital (K) Price of labor: wage rate (w) The capital price - R = depreciation ra