TEORI PENAWARAN UANG

[MONEY SUPPLY THEORY]

Disampaikan Oleh: H. Eko W. Suwardyono

MK: Ekonomi Moneter & Perbankan (1301E03A)
M-8 GENAP 2020-2021
 Source: Mishkin, 2007, Economics of Money,
Banking, and Financial Markets, Eighth Edition
 Pendahuluan:
Review tentang Uang & Jumlah Uang
Beredar [JUB]
According to the Quantity Theory of Money, see below figure, an
increase in the money supply -> An increase in price levels .
 Meaning of Money
• Money (money supply) anything that is
generally accepted in payment for goods or
services or in the repayment of debts; a stock
concept. Money supply is the total amount of
money available in the economy (stock concept)

• Wealth the total collection of pieces of

property that serve to store value (stock
concept)

• Income flow of earnings per unit of time (flow

concept)
9
 Functions of Money
1. Medium of Exchange—promotes economic
efficiency by minimizing the time spent in exchanging
goods
and services. Facilitates specialization and division of
labor. A good medium of exchange
•Must be easily standardized, widely accepted
divisible, easy to carry, not deteriorate quickly

2. Unit of Account—used to measure value in

the economy: assets, goods, services.

3. Store of Value—used to save purchasing power;

allows intertemporal substitution of income
•most liquid of all assets but High inflation
diminishes its “store of value” function. 10
 Meaning and Function of Money
Economist’s Meaning of Money
1.Anything that is generally accepted in payment for
goods and services
2.Not the same as wealth or income

Functions of Money
1.Medium of exchange
2.Unit of account
3.Store of value

Evolution of Payments System

1.Precious metals like gold and silver
2.Paper currency (fiat money)
3.Checks
4.Electronic means of payment
5.Electronic money: Debit cards, Stored-value cards,
Smart cards, E-cash
 MEASURING MONEY SUPPLY
[PENGUKURAN JUMLAH UANG BEREDAR, JUB]
 Measuring Money
from most liquid (narrow) to the least liquid
(broad)
• The contraction of the money stock M is divided
by the central banks in the following money
aggregates:
• M0 = C = Narrowest Money
•Base Money = High Powered Money
•M1 = Narrow Money
•M2 = Intermediate Money
•M3 = Broad Money
NARROWEST MONEY=MONEY IN CIRCULATION
=CURENCY IN CIRCULATION= C = M0
 BASE MONEY = HIGH POWERED MONEY
= MONETARY BASE = TOTAL CURRENCY
= UANG INTI = MB

CASH
MONETARY
RESERVE =
BASE = NARROWEST
CASH
HIGH MONEY =
VAULTS =
POWERED MONEY IN
RESERVE
MONEY = CIRCULATION
=TOTAL
UANG INTI = C = M0 RESERVES
= MB = R
 NARROW MONEY= UANG SEMPIT =
M1

DEMAND
NARROW NARROWEST DEPOSITS =
MONEY = MONEY = CHECKING
UANG MONEY IN ACCOUNTS
SEMPIT CIRCULATION =CHECKABLE
C M0 DEPOSITS =
= M1 = =
DD = D
 BASE MONEY & MONEY SUPPLY [M1]

CASH
MONETARY RESERVE =
NARROWEST
BASE = HIGH CASH VAULTS
MONEY =
POWERED = RESERVE
MONEY IN
MONEY = =TOTAL
CIRCULATION
UANG INTI RESERVES
= MB = C = M0 = R [Not
Part of M1]

DEMAND
NARROWEST DEPOSITS =
NARROW MONEY=MONEY CHECKING
MONEY = IN ACCOUNTS
CIRCULATION =CHECKABLE
M1
C=M0 DEPOSITS =
DD = D
Mo, MB, Money Supply [M1]
 INTERMEDIATE MONEY = M2

NARROW
INTERME SMALL
DIATE MONEY =
SAVINGS
MONEY UANG + TIME
= M2 SEMPIT DEPOSITS
= M1
Measuring money
29
 PROSES PENAWARAN UANG
[THE MONEY SUPPLY PROCESS]
The Money Supply Process
• The Money Supply is an economic variable
that has an impact on interest rates,
exchange rates, inflation and an economy’s
output.

• The Central Bank [CB] attempts to manage

the money supply

• How does a central bank do it? We must

know what influences the money supply.
 Money Supply Process

MONETARY MONEY =
MONEY SUPPLY
BASE MULTIPLIER

Determined by CB
Determined The Banking System
by CB The Non-Bank
Public
 Money Supply Process...
Four Players in the Money Supply Process:

1. The Central Bank [CB]

2. Banks
3. Depositors
4. Borrowers from banks

The CB is the most important

 The Fed’s Balance Sheet
Federal Reserve System

Assets Liabilities
Government securities MONETARY BASE [MB]:
Discount loans Currency in circulation[C]
Reserves Deposits [R]

Monetary Base, MB = C + R
 Four Players
in the Money Supply Process
1.Central bank: the Fed  Ind: BANK INDONESIA
2. Banks
3. Depositors
4. Borrowers from banks

Federal Reserve System  Ind: BANK

INDONESIA [BI]

1.Conducts monetary policy

2.Clears checks
3.Regulates banks
 MONETARY BASE [MB]
• In order to follow its responsibilities as keeping
economic stability, Central Bank (CB) should be able
to affect money supply.

• Or CB should be capable to bring the targeted level

of liquidity in the economy.

• As a measurment of liquidity,CB should choose a

monetary indicator that can follow at daily base

• In the most economies,a such indicator is Monetary

Base [MB]
MONETARY BASE....

Why not to follow Money Supply instead of

MB?

1.MB can be followed within balance sheet of

CB [cq. BI]

2.MB has strong relation with money supply

3.MB consist of all monetary tools.

 MONETARY BASE...

•The monetary base equals currency in

circulation [C] plus total reserves [R] in banking
system

 MB = C + R

•MB is also called High-Powered Money as

being a very important part of money supply.
An increase in MB will lead to a multiple
increase in money supply.
 MONETARY BASE...
Uses of the base:
MB= (CB banknotes+Treasury currency-coin) + reserves

Sources of the base:

MB=Net Foreign Assets+Net Domestic Assets- Net
Other Liabilities
Or
MB= Securities+discount loans+gold&SDRs+float+ other
assets+Treasury currency-Treasury deposits-foreign
and other deposits-other cb liabilitiesand capital

CBs can affect the monetary base by:

– Increase or decrease of NFA
– Increase or decrease of NDA
Factors Affecting the MB
 The Determinants of the Money
Supply
The money multiplier, reserve and currency ratios,
and borrowed reserves
M1 and the Monetary Base
• Recall: M1 as currency in circulation [C] plus checkable
deposits [D]
• Recall: MB as currency in circulation [C] plus reserves [R]

• The Fed has greater control over MB than it does over M1

•Checkable deposits are influenced by a number of
factors that the Fed does not have direct control over.

• We link MB and M1 together through the money multiplier

•M1 = m x MB
•For every $1 increase in the MB, the money supply
(M1) increases by m x $1
•m is almost always greater than 1.
 The Currency Ratio

• How much currency does the public hold

relative to their checkable deposits?
•We assume that the desired level of
currency (C) is a constant fraction of
checkable deposits (D)

•The currency ratio (c) is a constant (in

equilibrium) defined as:

c = C/D  %D

•C can change, but only in constant

proportion to D
 Reserve Ratios
What fraction of checkable deposits do banks hold in
reserve (Required Reserve, RR)?
•Banks are required by the Fed to hold a minimum fraction
in reserve defined as the reserve requirement ratio (RRR)
or “r” (%D)
•Banks may choose to hold excess reserve [ER].

RR be the required reserves held by banks

•RR = rr x D, where rr (r) is a parameter set by the Fed
ER be the excess reserves held by banks
•ER = e x D, where e is assumed to be a constant
proportion set by banks

Total reserves (TR, R):

R = RR + ER = [rrxD] + [exD] = (rr+e) x D
•Note that we have been assuming so far that ER=0.
 Deriving the Money Multiplier
• We define MB as currency (C) plus reserves
(R)

• Using our definitions:

•MB = C + R
•MB = C + RR + ER
•MB = [c x D] + [rr x D] + [e x D]

MB = (rr+e+c) x D

• The monetary base is equal to the fraction

of deposits allocated to required reserves,
excess reserves, and currency in circulation
Deriving the Money Multiplier…
• MB = (rr + e + c) D

• Rearranging gives: D  1
MB
rr  e  c
• Recall M1 = C + D = (cD) + D = (1+c) D

• Plugging in our definition of D:

1 c
M1  MB
rr  e  c
• Since M1 = m x MB: 1 c
m
rr  e  c
 Example 1
• Suppose the desired currency ratio is 40%, the
reserve requirement is 10% and the excess
reserve ratio is 0.5%

• The money multiplier is:

•m = (1+0.4)/(0.1 + 0.4 + 0.005) = 2.77

•A one dollar increase in the monetary base [MB] will
lead to a $2.77 increase in the money supply [M1]

• Note that if c = e = 0, then the money multiplier would

have been 10.
• Accounting for currency and excess reserves is clearly
important.
 Example 2
• Let c = 0.25, e = 0.001, and rr = 0.1.
Compute the money multiplier

m = (1+0.25)/(0.1+0.001+0.25) = 3.56

• The Fed decides to increase rr to 20%.

What happens to the money multiplier (and
the money supply as a result?)

m = 1.25/0.451 = 2.7
•A smaller multiplier means that banks create less
money through lending and therefore the money
supply will fall.
 Example 3
What happens to the money multiplier when the
desired currency ratio rises?

Let c = 0.2, rr = 0.25, and e = 0.05

m = (1+0.2)/(0.25+0.05+0.2) = 1.2/0.5 = 2.4

Now suppose c rises to 0.3, while all other variables

remain constant
m = (1+0.3)/(0.25+0.05+0.3) = 1.3/0.6 = 2.17

•Increasing the fraction of deposits held as currency

causes the money supply to fall
•Money is being taken out of the banking system
where it could have been used to make loans.
 Example 4
• C = currency held by the public = $400 billion 
D = checking deposits = $800 billion 
ER = excess reserves = $0.8 billion 
M1 = narrowest measure of money supply = C + D =
$1200 billion
rr (r) = 10%

• Plugging those numbers into our formula for m, the money

multiplier, m is:

                 1 + [400/800]                           1 + 0.5                  1.5 

m = ------------------------------------- = ----------------------- = --------- = 2.496 
        0.10 + [0.8/800] + [400/800]     0.1 + 0.001 + 0.5       0.601
 Factors that Determine the
Money Multiplier
• Changes in the required reserve ratio r
•The money multiplier and the money supply
are negatively related to r
• Changes in the currency ratio c
•The money multiplier and the money supply
are negatively related to c
• Changes in the excess reserves ratio e
•The money multiplier and the money supply
are negatively related to the excess reserves
ratio e
 Changes in the Currency Ratio
• We have assumed that the constant currency
ratio is an independent parameter for simplicity.

• A more complete analysis would examine the

factors that cause c to change.
1.Changes in income/wealth
•Larger proportions of currency are held by people with low
income/wealth
•As income/wealth rises, the ratio of currency to deposits falls

2.Changes in expected returns

•As the interest rate on deposits rises, c falls
•As the cost of acquiring currency falls, c rises
•Fears of bank insolvency (i.e. bank panics) cause c to rise
sharply
•Increases in illegal activity cause c to rise
 The Currency Ratio Over Time

Series of bank ATM’s lower

panics the cost of
acquiring
currency
Big tax Increased
increases illegal drug
trade
 Changes in the Excess Reserve Ratio
• What are the costs and benefits to banks of holding
excess reserves?

• Market Interest Rates (-)

•Every dollar held as an excess reserve has an opportunity cost
equal to the interest rate it could have earned as a bank loan
•As market interest rates rise, this opportunity costs increases and
banks hold fewer excess reserves
•e is negatively related to market interest rates

• Expected Deposit Outflows (+)

•The main benefit of holding excess reserves is that they insulate
the bank (somewhat) from sudden deposit outflows
•With excess reserves, banks do not have to call in loans, sell off
other assets, or borrow from the Fed to cover deposits being
withdrawn
•If banks think that deposit outflows will increase, they would be
wise to increase their excess reserve ratio
•e is positively related to expected deposit outflows.
Excess Reserves and Market Interest Rates
 The Decline of the Reserve Ratio
as a Policy Tool
• The preceding analysis suggests that the Fed can
increase/decrease the money supply by lowering/raising the
reserve ratio.
•While the Fed used this policy tool in the past, it has
become ineffective in the past decade or so.

•The Fed allows banks to classify some of their membership

deposits at the Fed as required reserves

•Banks have found that they need to keep extra currency in

ATM’s over weekends and holidays. This currency is
classified as vault cash and counts toward required reserves

• With these two developments, banks actually hold more

reserves than the minimum required by the Fed

• If rr is not binding, then any change in rr will have little to

no effect. (only works if you significantly increase rr!)
PENGENDALIAN THD UANG INTI
[CONTROL OF THE MONETARY BASE]
Control of the Monetary Base

CBs exercises control over the monetary base

via its three assets:

1. Through its purchases or sales of goverment

securities in the open market which is called
Open Market Operations [OMO]

2. Through its purchases or sales of foreign

exchange in the FX market.

3. Through its extension of discount loans to

banks
 Control of the Monetary Base
Increase in the Monetary Base
– Open market purchase from a bank
– Open market purchase from the Nonbank
Public
– Foreign exchange purchase
– Making discount loan to a bank

Decrease in the Monetary Base

– Open market sale
– Foreign exchange sale
– Bank to pay off a loan
 Control of MB....
Comparing OMOs and Discount loans
– Both causes change in the monetary base
– CB has greater control over OMOs
– CB sets discount rate,however banks borrow or not.

Other Factors that affect the Monetary Base

– Float
– Treasury deposits
– Fluctuations are ususally predictable and so can be
offset through OMOs
– Although Float and Treasury deposits with CB
undergo substantial short-run fluctuations, tehy do
not prevent CB from accurately controlling it
Control of MB...
Budget deficit and the Monetary Base

– Budget deficit is financed by Treasury

securities
– Sales of securities by the Treasury =
change in Treasury securities held by banks
and nonbank public+ CB purchase of
Treasury securities
– If it is financed by CB purchase of
Treasury securities which is called “
monetizing the debt” causes monetary base
to increase.
 Multiple Deposit Creation

• Monetary Base is the base for money supply.

Changes in the monetary base causes change in
the money supply.

• When CB supplies the banking system $1 of

additional reserves,deposits increase by a
multiple of this amount- a process called
multiple deposit creation
 SIMULATION:
CONTROL OF THE MONETARY
BASE
 REMEMBER !!: The Fed’s Balance
Sheet
Federal Reserve System

Assets Liabilities
Government securities Currency in circulation[C]
Discount loans Reserves [R]

Monetary Base, MB = C + R
 Control of the Monetary Base
Open Market Purchase from Bank
The Banking System The Fed
Assets Liabilities Assets Liabilities
Securities – $100 Securities + $100 Reserves + $100 [R]
Reserves + $100

Open Market Purchase from Public

Public The Fed
Assets Liabilities Assets Liabilities
Securities – $100 Securities + $100 Reserves + $100 [R]
Deposits + $100

Banking System
Assets Liabilities
Reserves Checkable Deposits
+ $100 + $100

Result: R  $100, MB  $100

If Person Cashes Check
Public The Fed
Assets Liabilities Assets Liabilities
Securities – $100 Securities + $100 Currency + $100 [C]
Currency + $100

Result: R unchanged, MB  $100 [+ C]

Effect on MB certain, on R uncertain
Shifts From Deposits into Currency
Public The Fed
Assets Liabilities Assets Liabilities
Deposits – $100 Currency + $100 [C]
Currency + $100 Reserves – $100 [R]

Banking System
Assets Liabilities
Reserves – $100 Deposits – $100

Result: R  $100, MB unchanged [+ C, - R]

 Discount Loans

Banking System The Fed

Assets Liabilities Assets Liabilities
Reserves Discount Discount Reserves
+ $100 loan + $100 loan + $100 + $100

Result: R  $100, MB  $100

Conclusion: Fed has better ability to control

MB than R
Deposit Creation: Single Bank
First National Bank
Assets Liabilities
Securities – $100
Reserves + $100
First National Bank
Assets Liabilities
Securities – $100 Deposits + $100
Reserves + $100
Loans + $100
First National Bank
Assets Liabilities
Securities – $100 Deposits + $100
Loans + $100
Deposit Creation: Banking System
Bank A
Assets Liabilities
Reserves + $100 Deposits + $100
Bank A
Assets Liabilities
Reserves + $10 Deposits + $100
Loans + $90
Bank B
Assets Liabilities
Reserves + $90 Deposits + $90
Bank B
Assets Liabilities
Reserves +$9 Deposits + $90
Loans + $81
Deposit Creation
Deposit Creation

If Bank A buys securities with $90 check

Bank A
Assets Liabilities
Reserves + $10 Deposits + $100
Securities + $90

Seller deposits $90 at Bank B and process is same

Whether bank makes loans or buys securities, get same

deposit expansion
Deriving the Formula

D = change in total checkable deposits in the banking

System
r= required reserve ratio

R = change in reserves for the banking system

Reserves= R = Required reserve (RR)+ Excess Reserve
(ER)  R = RR + ER
IF: ER=0  R=RR  RR= r x D

D= 1/r x RR
D = 1/r x R
 Deposit Multiplier

Simple Deposit Multiplier

D = 1/r  R


Deriving the formula:

R = RR = r  D

D = 1/r  R
D = 1/r  R
Deposit Creation:
Banking System as a Whole

Banking System

Assets Liabilities
Securities – $ 100 Deposits + $1000
Reserves + $ 100
Loans + $1000

Critique of Simple Model

Deposit creation stops if:
1. Proceeds from loan kept in cash
2. Bank holds excess reserves
MONEY MULTIPLIER [m]
Money Multiplier
M = m  MB
Deriving Money Multiplier
R = RR + ER
RR = r  D
R = (r  D) + ER
Adding C to both sides
R + C = MB = (r  D) + ER + C

1. Tells us amount of MB needed support D, ER and C

2. $1 of MB in ER, not support D or C

MB = (r D) + (e D) + (c D)

= (r + e + c)  D  D = 1/(r+e+c) x MB
 Factors that determine the MB

MB = (r D) + (e D) + (c D)

= (r + e + c)  D  D = 1/(r+e+c) x MB

• r = required reserve ratio = RR/D

• e = excess reserve ratio = ER/D
• c = currency ratio = C/D

 MB = f (r, e, c)
80
What affect monetary base?

• Open market operations are controlled by the

Fed.
• The Fed cannot determine the amount of
borrowing by banks from the Fed (Discount
loans, DL).
• Split the monetary base into two components
•Discount loans: borrowed reserves, BR
•Remainder: non-borrowed monetary base, MBn,
(MBn= MB - BR )

 M = m*(MBn + BR)
Factors that determine the Money
Supply (M)
• Previously we knew that required reserve
ratio (r), currency ratio (c), and excess
reserves ratio (e) negatively affect
monetary multiplier (m) and thus negatively
affect money supply.
• The money supply is positively related to
nonborrowed monetary base (MBn).
• The money supply is positively related to
borrowed reserve from the Fed (BR).
Changes in the nonborrowed
Monetary Base (MBn )
M = m*(MBn + BR)
The Fed’s open market purchase 
increase in nonborrowed monetary base
(MBn)  increase in monetary base (MB)
 support more currency and deposits 
increase money supply (M).

The money supply (M) is positively related

to the nonborrowed monetary base (MBn)
How about open market sale?
 Changes in the borrowed reserves
(BR) from the Fed

• M = m*(MBn + BR)  BR = DL

• If discount loans increase  borrowed

reserves (BR) increase  monetary base (MB)
increase  support more currency and
deposits and thus a higher money supply.

• The Money Supply is positively related to the

level of borrowed reserves, BR, from the Fed.
 1
D=  MB
r+e+c
M = D + (c D ) = (1 + c) D

1+c
M=  MB
r+e+c
1+c
m =
r+e+c

m < 1/r because no multiple expansion for currency and

because as D  ER 

Full Model: M = m  (MBn + DL)  DL = BR

Factors Determining Money Supply
 Excess Reserves Ratio

Determinants of e
1. i , relative Re on ER  (opportunity cost ), e 
2. Expected deposit outflows, ER insurance worth more, e 
 TERIMA KASIH
SEMOGA SUKSES!!