Money Multiplier

--Finding m

Method 1, m=M2÷MB

1.We’ve found M2 before in homework

2.From the website of the People’s Bank of China

http://www.pbc.gov.cn/publish/diaochatongjisi/133/index.html

we find MB in the Balance Sheet of Monetary Authority, which is also called Reserve Money

3.calculate m

Method 2, m=(1+C) ÷(r+e+c)

1. We’ve found currency (M0) before in homework

2.D=M2-C

3.we find r in a financial news report http://finance.ifeng.com/news/20100502/2136641.shtml

4.R=MB-C

5.ER=R-rxD

6.c=C÷D,e=ER÷D

7.calculate m

We get the same m in both methods.

--Analyzing m

We can see that c doesn't change a lot, while e and r change more obviously. So, we can say that the change in m of China in the last few years is mainly caused by r and e. Though e and r are fluctuating, e has a trend of decreasing，r has a trend of increasing

For the equation m=(1+C) ÷(r+e+c), we suppose that c is constant, then m should be negatively related to (r+e). That means m is positively related to 1/（r+e）

According to the data, we make the figure below. The figure shows that m is really highly positively related to 1/(r+e)

Then we turn to another question - Why there is a trend that e falls and r rises?

The trend shows that the financial institutes' excess reserves ratio of our country has been declining every year. The main reasons are shown as below:

1. After People's Bank of China reforming the reserve against deposit system in March, 1998, required reserves can be used during business days for payment and settlement.

2. With the interest rate of excess reserves becoming lower step by step and the constant reform of the share-holding system of commercial banks, financial institutes pay more attention to ensure better cost-effectiveness. Subjectively, it has the tendency to lower excess reserves ratio.

3. The depth and width of financial market keep expanding. The number of monetary market's short-term financing tools increases. The scale of bonds and assets holdings of...