Return to Contents Page

 


Money Supply

... Types of Money.  This story uses M0 and M1.

Fractional Reserve Banking

Banks were originally required to hold reserves to guarantee the stability of the banking system.  The reserve requirement has proven to be a useful mechanism for controlling the money supply.  

Suppose the reserve requirement is 10% of deposits.  The chart to the right shows effect on deposits when the Fed injects $100 into Bank A.  (We discuss below how the Fed accomplishes this.)

Open Market Operations

The Fed injects the $100 by conducting open market operations.  The open market desk of the New York Federal Reserve Bank buys $100 worth of Treasury bills and pays for them with a newly created $100 deposit at the Fed.

The Discount Window

[no longer in service]

References

Federal Reserve System, Manuel H. Johnson, Concise Encyclopedia of Economics.
Money Supply, Anna J. Schwartz, Concise Encyclopedia of Economics.
Money Supply, Wikipedia.


Return Link:  Contents  Money

Comments?  Questions?  macro-at-econmodel-dot-com  Copyright 2006 William R. Parke