EC4303 – MONETARY ECONOMICS

Reference: Frederic S. MISHKIN (2017) The Economics of Money, Banking and

Financial Markets 11th ed. Pearson, or earlier editions.

3. The Money Supply Process

Department of Economics
National University of Lesotho
 CONTENTS
3.1 The Balance Sheet of the Central Bank

3.2 Control of the Monetary Base

3.3 Factors that Determine the Money Supply

Presentations:
a) When does a central bank’s balance sheet require fiscal support?
(Reference: Reis, R., 2015. Comment on: “When does a central bank’s
balance sheet require fiscal support?” by Marco Del Negro and Christopher
A. Sims. Journal of Monetary Economics, 73, pp.20-25).
b) Digital Currency and Implications for Monetary Policy (Reference: Bordo,
M.D. and Levin, A.T., 2017, Central bank digital currency and the future of
monetary policy (No. w23711), National Bureau of Economic Research).
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 3.1 The Balance Sheet of the Central Bank

 The operation of the central bank and its monetary policy involve actions
that affect its balance sheet, its holdings of assets and liabilities. Below is
a simplified balance sheet that includes just four items that are essential
to our understanding of the money supply process:

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 3.2 Control of the Monetary Base
 The monetary base (also called high-powered money) equals currency
in circulation C plus the total reserves in banking system R.

 The Central Bank exercises control over the monetary base through
open market operations (non-borrowed monetary base) and discount
lending (borrowed reserves).

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3.3 Factors that Determine the Money Supply

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 3.3 Factors that Determine the Money Supply (cont…)
 M1 Money Multiplier:

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 3.3 Factors that Determine the Money Supply (cont…)
 Exercise: M2 Money Multiplier: Given M2 as

show that

and justify the response of M2 to its own determinants.

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 END!!

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