By the end of this chapter, students should be able to:
- Describe who determines the money supply.
- Explain how the central bank’s balance sheet differs from the balance sheets of commercial banks and other depository institutions.
- Define the monetary base and explain its importance.
- Define open market operations and explain how they affect the monetary base.
- Describe the multiple deposit creation process.
- Define the simple deposit multiplier and explain its information content.
- List and explain the two major limitations or assumptions of the simple deposit multiplier.
- Compare and contrast the simple money multiplier and the m1 and m2 multipliers.
- Write the equation that helps us to understand how changes in the monetary base affect the money supply.
- Explain why the M2 multiplier is almost always larger than the m1 multiplier.
- Explain why the required reserve ratio, the excess reserve ratio, and the currency ratio are in the denominator of the m1 and m2 money multipliers.
- Explain why the currency, time deposit, and money market mutual fund ratios are in the numerator of the M2 money multiplier.
- Describe how central banks influence the money supply.
- Describe how banks, borrowers, and depositors influence the money supply.