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
GIVE EXAMPLES OF EACH OLIGOPOLY MODELS FROM REAL LIFE

What does economic theory contribute to managerial economics? Explain

Moving Average Methods: Under this methods the moving average to the sales of the past years is computed. The computed moving average is taken as forecast for the next year or peri

What is the distinguishing characteristic of institutions in the public purpose sphere? The distinguishing characteristic of institutions in the public purpose sphere is that t

LONG PERIOD ANALYSIS: Long period refers to a time when all the factors are variable. Earlier in the short period analysis, we had considered capital (K) to be fixed factor. H


So what caused the end of Malthusian age? How did humanity escape from the trap in that invention and ingenuity increased the numbers though not the material well-being of humanity

compare marginal rate of technical substitution and marginal rate of substitution

Explain consumer sovereignty and why it might not be that extensive in real life. Explanation of consumer sovereignty Use of S/D model to show how changes in consumption pat

what is the theory of supply