Chapter 11The Central BankBalance Sheetand the MoneySupplyProcessMcGraw-HilyrwinCopyright 2006byTheMcGraw-Hill Companies,Inc.All rights reserved
McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 The Central Bank Balance Sheet and the Money Supply Process
CONTENSO11.1TheCentralBank'sBalanceSheet11.2ChangingCentral BankBalanceSheet11.3TheDepositExpansionMultiplier11.4MonetaryBaseandtheMoneySupply11.5Arithmeticof MoneyMultiplier11.6LimitsonCentralBank'sControlofMoneySupply7-2
17-2 CONTENS 11.1 The Central Bank’s Balance Sheet 11.2 Changing Central Bank Balance Sheet 11.3 The Deposit Expansion Multiplier 11.4 Monetary Base and the Money Supply 11.5 Arithmetic of Money Multiplier 11.6 Limits on Central Bank’s Control of Money Supply
10.1TheCentralBank'sBalancedSheetFigure 17.1 The Central Bank's Balance SheetAssetsLiabilitiesGovernment'sSecuritiesCurrencyBankForeignexchangereservesGovernment'saccountBankersLoansAccounts ofthecommercialBankbanks (reserves)WebLink17-3
17-3 10.1 The Central Bank’s Balance Sheet Web Link
TheCentralBank's Balance Sheetd1. AssetsSecurities.Fed holds only U.S. Treasury securitiescontrolled throughpurchases and sales knownas"open market operations."ForeignExchangeReservesbonds issuedbyforeign governmentsLoansDiscountLoansFloat17-4
17-4 The Central Bank’s Balance Sheet 1. Assets • Securities • Fed holds only U.S. Treasury securities • controlled through purchases and sales known as “open market operations.” • Foreign Exchange Reserves • bonds issued by foreign governments • Loans • Discount Loans • Float
TheCentralBank'sBalance SheetO2. LiabilitiesCurrencyGovernment AccountsReservesCommercialBank'sCheckingAccounts17-5
17-5 The Central Bank’s Balance Sheet 2. Liabilities • Currency • Government Accounts • Reserves • Commercial Bank’s Checking Accounts
TheCentralBank'ssBalanceaSheet3. Monetary Base (or High-Powered MoneyCurrency held by the public + reserves inthe banking systemBank Reserves = Vault Cash + Deposits atthe Fed.The central bank can control the size ofthe monetary base17-6
17-6 The Central Bank’s Balance Sheet 3. Monetary Base (or High-Powered Money) • Currency held by the public + reserves in the banking system • Bank Reserves = Vault Cash + Deposits at the Fed. • The central bank can control the size of the monetary base
11.3ChangingSizeand CompositionCoftheBalanceSheet1. Open Market OperationsThe Federal Reserve buys or sells securities infinancial markets.Figure17.2Changein the Federal Reserve System'sBalance SheetfollowingPurchase of aU.S.Treasury BondAssetsLiabilities+$1billionSecurities+$1billionReserves(U.S.Treasurybond)17-7
17-7 11.3 Changing Size and Composition of the Balance Sheet 1. Open Market Operations • The Federal Reserve buys or sells securities in financial markets
Changing Sizeand Compositionofdthe Balance SheetOpenMarketOperationsFigure17.3Change in the Banking System's BalanceSheet following the Fed's Purchase of aU.S.Treasury BondAssetsLiabilities+$1billionReservesSecurities-$1billion(U.S.Treasurybond)17-8
17-8 Changing Size and Composition of the Balance Sheet Open Market Operations
Changing Size and Composition ofathe BalanceSheet2.Foreign Exchange InterventionFigure17.4Change in the Federal Reserve System'sBalance Sheet followingPurchase of Eurodenominated German Government BondsAssetsLiabilitiesForeignexchange+$1billion+$1billionReservesreserves(Germangovernmentbondsineuros)17-9
17-9 Changing Size and Composition of the Balance Sheet 2. Foreign Exchange Intervention
ChangingSizeand Compositionofdthe BalanceSheetForeign Exchange InterventionFigure17.5Change in the Banking System's Balance Sheetfollowing the Fed's Purchase of EurodenominatedGermanGovernment BondsAssetsLiabilities+$1billionReservesSecurities-$1billion(Germangovernmentbonds)17-10
17-10 Changing Size and Composition of the Balance Sheet Foreign Exchange Intervention