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Gregory Mankiw
Principles of
Macroeconomic
s
Sixth Edition
16
Saving, Investment,
and the Financial System
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Premium
PowerPoint
Slides by
Ron
In this chapter,
look for the answers to these questions:
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Money
the set of assets in an economy that people
regularly use to buy goods and services from
other people
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11
Clicker question
Ben Bernanke
A. Has a beard.
B. Is greying.
C. Is the Chairman of the Federal Open Market
Committee.
D. Is all of the above.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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12
Bank Reserves
In a fractional reserve banking system,
banks keep a fraction of deposits as reserves
and use the rest to make loans.
The Central Bank establishes reserve
requirements, regulations on the minimum
amount of reserves that banks must hold against
deposits.
Banks may hold more than this minimum amount
if they choose.
The reserve ratio, R
= fraction of deposits that banks hold as reserves
= total reserves as a percentage of total deposits13
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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Bank T-Account
T-account: a simplified accounting statement
that shows a banks assets & liabilities.
Example:
FIRST NATIONAL BANK
Assets
Liabilities
Reserves $ 10 Deposits $100
Loans $ 90
14
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
16
Money supply
= currency + deposits = $0 + $100 = $100
In a 100% reserve banking system,
banks do not affect size of money supply.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
17
18
19
20
21
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
23
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
24
Bank
Bank
deposits
deposits
currency
currency
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
25
Granting a loan:
Commercial banks create money when they make
loans to businesses and the public
Buying government securities:
Is simply loaning out X-sum of rupees equivalent
to the value of the bonds, which in turn, increase
bank's asset by X-rupees and demand deposits by
X-rupees
By earning profits
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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26
Assets
Bank A
Primary deposits
100 Loans
Reserves
New deposits
10
Bank B
90 loans
Reserves
90
81
Bank C
New deposits
81 loans
: Reserves
Total deposits
72.9
8.1
:
1000
27
Credit Creation
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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28
Economy
Two Sectors
Rs
Public
Bank
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
29
Public
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
30
Rs
Bank
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
31
Assumptions
Fractional reserve banking system
Demand deposit only
No excess reserves
No cash leakage
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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32
Illustration
Required reserve
ratio (RRR) =25%
Jack put Rs.200 into
the bank as an initial
demand deposit
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
33
First Round
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
34
First Round
Rs.200
Public
Rs
Bank
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
35
First Round
Rs.200
Rs
Publi
c
Bank
Rs.150
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
36
Second Round
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
37
Second Round
Rs.200
Rs.150
Publi
c
Rs
Bank
Rs.150
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
38
Second Round
Rs.200
Rs.150
Publi
c
Rs
Bank
Rs.112.50
Rs.150
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
39
Third Round
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
40
Third Round
Rs.200
Rs.150
Rs.112.50
Publi
c
Rs
Bank
Rs.112.5
Rs.150
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
41
Third Round
Rs.200
Rs.150
Rs.112.50
Publi
c
Rs
Bank
Rs.84.40
Rs.112.50
Rs.150
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
42
Nth Round
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
43
Nth Round
Publi
c
Rs.200
Rs.150
Rs.112.50
Rs.84.4
R
0 s.63.30
.
.
.
.
Rs.84.40
Rs.112.50
Rs.150
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Rs
Bank
44
Nth Round
Publi
c
Rs.200
Rs.150
Rs.112.5
Rs.84.4
Rs.63.30
.
.
.
.
Rs.84.40
Rs.112.50
Rs.150
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Rs.
Bank
45
Credit Creation
1st round : Rs.200
2nd round : Rs.150
3rd round : Rs.112.50
4th round : Rs.84.40
5th round : Rs.63.30
6th round : .
7th round : .
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
46
Credit Creation
Total
?
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
47
1
Bank multiplier =
Required reserve ratio
Total deposit increment
= initial deposit x banking multiplier
Rs.
Bank
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
48
Rs.
Bank
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
49
Remember
Required reserve
ratio (RRR) =25%
Jack put Rs.200 into
the bank as an initial
demand deposit
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
50
1
Bank multiplier =
Required reserve ratio
1
25%
=4
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
51
Rs.800
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
52
Rs.200
RRR=25%
Multiplier = 4
Bank
Rs.800
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
53
ACTIVE LEARNING
2012
Cengage
2012 Cengage
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Learning.
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except
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54
ACTIVE LEARNING
Answers
55
ACTIVE LEARNING
Answers
Answer: $0
If your bank makes no loans from your deposit,
currency falls by $50, deposits increase by $50,
money supply does not change.
2012
Cengage
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56
Clicker question
In a 100% reserve banking system, the money
multiplier is
A. 0.
B. 10.
C. 1.
D. 100.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
57
58
Liabilities
Deposits $ 800
Debt $ 150
Capital $ 50
59
Liabilities
Deposits $ 800
Debt $ 150
Capital $ 100
60
Liabilities
Deposits $ 800
Debt $ 150
Capital $ 0
61
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
62
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
63
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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64
Liabilities
Deposits $ 760
Debt $ 0
Capital $ 40
Capital declines.
Assets must shrink so that the bank maintains the
minimum leverage ratio.
65
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66
67
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68
69
70
71
72
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73
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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74
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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75
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
76
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
77
Clicker question
Reducing R, the reserve requirement
A. Makes monetary policy more powerful and
reduces the likelihood of a bank run.
B. Makes monetary policy less powerful and
reduces the likelihood of a bank run.
C. Makes monetary policy less powerful and
increases the likelihood of a bank run.
D. Makes monetary policy more powerful and
increases the likelihood of a bank run.
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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78
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
79
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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80
rf
The Federal
Funds market
S2
S1
3.75%
3.50%
causes rf to rise.
D1
F2 F1
Quantity of
federal funds
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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81
SUMMARY
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82
SUMMARY
2012
Cengage
2012 Cengage
Learning.
Learning.
All Rights
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Rights Reserved.
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83
SUMMARY
2012
Cengage
2012 Cengage
Learning.
Learning.
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84