M1 Money Multiplier
M = Bm ….. m = M/B
M1 = DDO + CP
B = R + CP = Rr + Re + CP
m1 = M1/B = (DDO + CP)/(R + CP)
m1 = (1 + k)/(rr + re + k)
How the Fed influences m
k – Fed has no direct control – determined by the public – sensitive to changes in interest rates
rr – determined by the reserve requirement
re – determined by banks’ behavior – sensitive to changes in interest rates & the discount rate
 

Determinantsof k
k = CP/DDO
# of subs for DDO
Taxes and the underground economy
Interest rates
Income & wealth
Demographics (age, ethnicity)
Historical Behavior
k has risen as m has fallen (p. 362)
Determinantsof rr
Reserve Requirement (two-tiered)
3% on the first c. $50 million
10% on anything above that
Effective reserve requirement fluctuates as banks gain or lose deposits
Consider effect of a merger of two small banks
Determinants of re
“Desired excess reserves”
T-bill yield – T-bill’s liquidity makes them better for adjusting excess reserves than loan portfolio
Discount rate
Cash flow volatility
Expected Fed policy
The Money Multiplier
The Monetary Base (high powered money) is largely determined by the Fed
The amount of money in circulation is determined jointly by the Fed, banks, and public
The Fed must take banker and public behavior into account when setting monetary policy