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Final Exam ReviewMacroeconomics
Econ EB222 Fall 2012
Inst Shan A GaribMohawk College
Final Exam Macroeconomics
Date Friday December 14th 2012Time 1100am ndash 200pm
In-Class
Review ALL Quizzes given in class
Consumption Investment and Consumption Investment and the Multiplier Chapter 9the Multiplier Chapter 9
Consumption Consumption (Continued)(Continued)
bull The consumption functions statesndashAs income rises consumption (C)
rises but not as quicklyIncome = Consuption + Saving + taxes
Y = C + S + t and Disposible Income = Consuption + Saving
Yd = C + S or Yd = Y - tTherefore consumption varies with disposable income (DI)
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
At a YGDP0 = $10000bn consumption (C0) is $8600 bn The MPC = 025 At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
Since there are no taxes disposable income (DI) = (YGDP) ChngC = MPC x ChngDI
ChngDI = $10000bn - $9000bn = $1000bn
ChngC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the ChngC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $550bn
RememberChngC = MPC x ChngDI
If MPC = 050 ChngDI +$50000 ChngC = 050 x $50000bn = $25000
If C0 $25000 with ChngC = $25000 C1 = $25000 + $25000 = $50000
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Final Exam Macroeconomics
Date Friday December 14th 2012Time 1100am ndash 200pm
In-Class
Review ALL Quizzes given in class
Consumption Investment and Consumption Investment and the Multiplier Chapter 9the Multiplier Chapter 9
Consumption Consumption (Continued)(Continued)
bull The consumption functions statesndashAs income rises consumption (C)
rises but not as quicklyIncome = Consuption + Saving + taxes
Y = C + S + t and Disposible Income = Consuption + Saving
Yd = C + S or Yd = Y - tTherefore consumption varies with disposable income (DI)
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
At a YGDP0 = $10000bn consumption (C0) is $8600 bn The MPC = 025 At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
Since there are no taxes disposable income (DI) = (YGDP) ChngC = MPC x ChngDI
ChngDI = $10000bn - $9000bn = $1000bn
ChngC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the ChngC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $550bn
RememberChngC = MPC x ChngDI
If MPC = 050 ChngDI +$50000 ChngC = 050 x $50000bn = $25000
If C0 $25000 with ChngC = $25000 C1 = $25000 + $25000 = $50000
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Consumption Investment and Consumption Investment and the Multiplier Chapter 9the Multiplier Chapter 9
Consumption Consumption (Continued)(Continued)
bull The consumption functions statesndashAs income rises consumption (C)
rises but not as quicklyIncome = Consuption + Saving + taxes
Y = C + S + t and Disposible Income = Consuption + Saving
Yd = C + S or Yd = Y - tTherefore consumption varies with disposable income (DI)
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
At a YGDP0 = $10000bn consumption (C0) is $8600 bn The MPC = 025 At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
Since there are no taxes disposable income (DI) = (YGDP) ChngC = MPC x ChngDI
ChngDI = $10000bn - $9000bn = $1000bn
ChngC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the ChngC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $550bn
RememberChngC = MPC x ChngDI
If MPC = 050 ChngDI +$50000 ChngC = 050 x $50000bn = $25000
If C0 $25000 with ChngC = $25000 C1 = $25000 + $25000 = $50000
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Consumption Consumption (Continued)(Continued)
bull The consumption functions statesndashAs income rises consumption (C)
rises but not as quicklyIncome = Consuption + Saving + taxes
Y = C + S + t and Disposible Income = Consuption + Saving
Yd = C + S or Yd = Y - tTherefore consumption varies with disposable income (DI)
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
At a YGDP0 = $10000bn consumption (C0) is $8600 bn The MPC = 025 At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
Since there are no taxes disposable income (DI) = (YGDP) ChngC = MPC x ChngDI
ChngDI = $10000bn - $9000bn = $1000bn
ChngC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the ChngC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $550bn
RememberChngC = MPC x ChngDI
If MPC = 050 ChngDI +$50000 ChngC = 050 x $50000bn = $25000
If C0 $25000 with ChngC = $25000 C1 = $25000 + $25000 = $50000
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Marginal Propensityto Consume (MPC)
MPC = in Consumption
in Income
CHANGECHANGE
CHANGECHANGE
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
At a YGDP0 = $10000bn consumption (C0) is $8600 bn The MPC = 025 At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
Since there are no taxes disposable income (DI) = (YGDP) ChngC = MPC x ChngDI
ChngDI = $10000bn - $9000bn = $1000bn
ChngC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the ChngC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $550bn
RememberChngC = MPC x ChngDI
If MPC = 050 ChngDI +$50000 ChngC = 050 x $50000bn = $25000
If C0 $25000 with ChngC = $25000 C1 = $25000 + $25000 = $50000
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
45
$1000
$1000
$6000
$6000
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
At a YGDP0 = $10000bn consumption (C0) is $8600 bn The MPC = 025 At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
Since there are no taxes disposable income (DI) = (YGDP) ChngC = MPC x ChngDI
ChngDI = $10000bn - $9000bn = $1000bn
ChngC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the ChngC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $550bn
RememberChngC = MPC x ChngDI
If MPC = 050 ChngDI +$50000 ChngC = 050 x $50000bn = $25000
If C0 $25000 with ChngC = $25000 C1 = $25000 + $25000 = $50000
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
C
$6000
5700
$6000
Saving = $300
$2700
$3000
Dissaving = $300
$2700
Saving = - $300
At a YGDP0 = $10000bn consumption (C0) is $8600 bn The MPC = 025 At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
Since there are no taxes disposable income (DI) = (YGDP) ChngC = MPC x ChngDI
ChngDI = $10000bn - $9000bn = $1000bn
ChngC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the ChngC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $550bn
RememberChngC = MPC x ChngDI
If MPC = 050 ChngDI +$50000 ChngC = 050 x $50000bn = $25000
If C0 $25000 with ChngC = $25000 C1 = $25000 + $25000 = $50000
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
At a YGDP0 = $10000bn consumption (C0) is $8600 bn The MPC = 025 At a Y GDP1 of $9000bn how much would be saved (Assume there is no taxes in the economy)
Since there are no taxes disposable income (DI) = (YGDP) ChngC = MPC x ChngDI
ChngDI = $10000bn - $9000bn = $1000bn
ChngC = 025 x -$1000bn = -$250bn
Since C0 was $8600bn the ChngC of -$250bn will bring consumption down to C1 = $8350bn (= $8600bn - $250bn)
If S = DI ndash C1
At a national income of $9000bn(S) = $9000bn of DI - $8350bn of C = $550bn
RememberChngC = MPC x ChngDI
If MPC = 050 ChngDI +$50000 ChngC = 050 x $50000bn = $25000
If C0 $25000 with ChngC = $25000 C1 = $25000 + $25000 = $50000
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
RememberChngC = MPC x ChngDI
If MPC = 050 ChngDI +$50000 ChngC = 050 x $50000bn = $25000
If C0 $25000 with ChngC = $25000 C1 = $25000 + $25000 = $50000
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
10
Fiscal Policy and the Public Debt
Chapter 10amp11 Instructor Shan A Garib Fall 2012
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Expansionary fiscal policybull If budget is initially balanced moves it towards
a budget deficit during recessionbull Increased government spending (G) andor
lower taxesbull Aim to stimulate economic activity and to move
the economy out of a recession
bP2
LRAS
Pric
e Le
vel
P1
Y2
AD1
AD2
Y1
c
SRAS
bP2
LRAS
Pric
e Le
vel
P1
AD1
AD2
c
SRAS1
Y1
d
SRAS2
Higher P and wages costs SRAS shift left
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Contractionary fiscal policybull If budget is initially balanced moves it towards
a budget surplus during an inflationary periodbull Decreased government spending andor
higher taxesbull Aim to control demand and reduce
demand-pull inflation
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1
b
SRAS
cP2
LRAS
Pric
e Le
vel
P1
AD2
AD1d
SRAS2
Y2 Y1
b
SRAS1
Lower P and wages costs SRAS shift right
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Government Budgets and Financesbull Governmentrsquos budget balance is amount of revenue it
recieves minus its spending
Balanced budget is whenRevenues = Spending
0 = Revenue ndash SpendingBudget Surplus is when
Revenues gt Spending0 gt Revenue ndash Spending
Budget Deficit is whenRevenues lt Spending
0 lt Revenue ndash Spending
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
14
Money and the Banking SystemChapter 12
Instructor Shan A Garib Fall 2012
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Defining Money (contd)
bull The transactions approach tomeasuring money M1
1048707 Currency1048707 Checkable (transaction) deposits1048707 Travelerrsquos checks not issued by banks
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Defining Money (contd)
bull The liquidity approach M2 is equal toM1 plus1 Savings and small denominationtime deposits2 Balances in retail money marketmutual funds3 MMDAs
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
17
Money Creation and Deposit Insurance
Chapter 13 Instructor Shan A Garib Fall 2012
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
bull Reserves
ndash deposits held by BOC for chartered banks like BMO plus their vault cash
Reserves
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Reserves
bull Legal Reserves
ndash Anything that the law permits banks to claim as reservesmdashfor example deposits held at BofC and vault cash
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Reserves
bull Required Reserves
ndash The value of reserves that a depository institution must hold in the form of vault cash or deposits with the BofC
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Reserves
bull Required Reserve Ratio
ndash The percentage of total transactions deposits that the Fed requires depository institutions to hold in the form of vault cash or deposits with the Fed
Required reserves = Demand deposits Required reserve ratio (M)
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
Reserves
bull Excess Reserves
ndash The difference between legal reserves and required reserves
Excess reserves = Legal reserves ndash Required reserves
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
The Money Multiplier (contd)
Actual changein the money
supply= Actual money
multiplierChange in
total reserves
Potential money multiplier = 1
Required reserve ratio
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
The Money Multiplier (contd)
bull Example
ndash Fed buys $100000 of government securities
ndash Reserve ratio = 10
Potential changein the money
supply= $100000 = $1000000x
1
10
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
The Bank of Canada purchases $10000 of Canadian government bonds on the open market directly from Scotia Bank If the required reserve ratio (m) is 25 then the maximum potential change in the money supply as a result of the open market operation will be All $10000 of these new reserves are excess reserves because
Required Reserves = M x Demand Deposits
and there has been no change in demand deposits so
Required Reserves = 25 x 0 = 0 Therefore
Excess reserves = Reserves of $10000 - Required Reserves of 0 = $10000
Resultant change in the money supply
= 1m x initial change in excess reserves
= (125) x $10000 = 4 x $10000 = $40000
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
BMO has $160 million of reserves The M 20 The Bank of Canada then lowers M to 16 How much can RBC lend out BMO is ALL LOANED UP ie it cannot make any additional loans so it has 0 excess reserves
Excess Reserves = Reserves - Required Reserves
Since excess reserves = 0 then
reserves = required reserves = $160 million
Required Reserves = M x Demand Deposits
$160 million = 20 x Demand Deposits
$160 million20 = Demand Deposits
$800 million = Demand Deposits By lowering the required reserve ratio to 16 required reserves will be reduced and excess reserves will increase as some required reserves are converted into excess reserves Now
Required Reserves = 16 x $800 million = 16 x $800 million
= $128 million Excess Reserves = Reserves - Required Reserves = $160 million - $128 million = $32 million the amount BMO may now lend out
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion
1997s money GDP was $8320 billion 1997s price level index was 1020 In 1997 to 2001 what is the real GDP 1997s real GDP
Real GDP = (Money GDPPrice Level Index) x 100
Real GDP for 1997 = ($8320 billion1020) x 100 = $8157 billion x 100
= $8157 billion