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Chapter 15 The Money Supply Process and the Money Multipliers

Chapter Objectives

By the end of this chapter, students should be able to:

  1. Describe who determines the money supply.
  2. Explain how the central bank’s balance sheet differs from the balance sheets of commercial banks and other depository institutions.
  3. Define the monetary base and explain its importance.
  4. Define open market operations and explain how they affect the monetary base.
  5. Describe the multiple deposit creation process.
  6. Define the simple deposit multiplier and explain its information content.
  7. List and explain the two major limitations or assumptions of the simple deposit multiplier.
  8. Compare and contrast the simple money multiplier and the m1 and m2 multipliers.
  9. Write the equation that helps us to understand how changes in the monetary base affect the money supply.
  10. Explain why the M2 multiplier is almost always larger than the m1 multiplier.
  11. 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.
  12. Explain why the currency, time deposit, and money market mutual fund ratios are in the numerator of the M2 money multiplier.
  13. Describe how central banks influence the money supply.
  14. Describe how banks, borrowers, and depositors influence the money supply.