The mechanism of the money multiplier Essay Example | Topics and Well Written Essays - 1000 words

The mechanism of the money multiplier - Essay Example This paper will aim to provide an explanation and illustration of the essential mechanisms behind the concept of money multiplier and intensively the manner monetary authorities can control its size and influence money supply in the economy. First, an overview of money measure will be put forth. Secondly, the mechanism in light of money multiplier will then be explained by use of symbols and equations to elaborate the cyclical variations in the multiplier factor. This will be followed by a scrutiny of money multiplier in the present economic environment which will be explained and lastly a description of the instruments of controlling money supply such as open market operation, reserve ratio and the discount window will be put in details to explain the impact in the size of money supply. A conclusion will then be provided of the general overview of the essay. The Reserve Ratio According to Valdez & Molyneux (2010, p. 111), different measures or dimensions can resolve on the issue of money supply denoted as M via monetary aggregates such as M2 and M4. The monetary aggregate M1 equals to the cash held household whilst M2 refers to the sum of deposit within the bound of retail banks and building societies in addition to the cash held by the household. M4 gives a broader measure of money which comprise of wholesale bank deposits and certificate deposits. These can be expressed as; M1 = Cash held by households M2 = M1 + retail banks and building society’s deposits M4 = M2 + wholesale banks deposits + certificate deposit The measures of money explained above shows the liquidity level of money held in supply even though broader measures indicate less liquidity held. The correlation amidst the bank of England, commercial banks and the households and the behavior which describes the supply of money in the form of deposit ratio of the currency and the reserve ratio. This can be expressed as; M = Deposits (D) + Currency deposit ratio (CU). The money multiplier main tains the mathematical connection amidst the monetary base and the economic supply of money. The monetary base or the high powered money is the summation of the currency in supply in addition to the banking system’s reserves. The money Multiplier can be articulated as; 1/rr this is the inverse of the reserve requirement ratio. For example if the reserve requirement is 20% then the multiplier effect is equal to 5. The extension of a nation’s Money supply that comes from banks ability to lend, the extent of the multiplier effect relies on the fraction of deposits that the banks are stipulated to maintain as reserves. In other terms, it is money used to make more money and is established as division of the total Bank deposits by the requirement of the reserve. The effect of the multiplier is dependent on the reserve requirement that has been set. Thus to get the effect of the multiplier on the supply of money, the first step is to get the amount banks earlier on take in v ia the deposits and then divided it by ratio of the reserve. For example, in case the reserve requirement is about 20% for each ? 200 a customer makes deposits into a bank, then ? 40 must be maintained as reserve. Nonetheless, the remaining ? 160 can be advanced to other banks customers as loans. This ? 160 is then made as deposits by the customers into other banks which simultaneously also keeps 20% or ? 32 in reserve but can loan out the remaining ? 128. This cycle goes on as more customers’ makes deposits of money and more banks proceed with the lending process until the ? 200 earlier deposited makes a total of ? 1000 (?200/0.2) in deposits. These deposits created forms the multiplier effect. It must be noted that the higher the reserve requirement, the tighter the supply of money, which eventually lead to a lower multiplier effect for every pound deposited (Cecchetti, 2008, p. 47). Subsequently, the lower the effect of the multiplier, the greater the supply of

Experimentation in social psychology Essay Example | Topics and Well Written Essays - 1250 words

Experimentation in social psychology - Essay Example Typically, social psychology aims to explain human behavior as a resultant of the interaction of an individual's current mental state and the situational context. The ways in which individuals react in different situational context vary based on several factors. These factors include prior learning as well as genetics. This essay will examine the utility of experimentation in the field of social psychology and will focus on the cognitive social and discursive perspectives. In order to delineate the differences between the utility of experimentation in cognitive social psychology and discursive psychological perspective, it is prudent that we offer operational definitions for each discipline and delineate their use of experimentation. In the case of cognitive social psychology, there are many features that distinguish this perspective from the other perspectives. They include a strong cognitive and social-interpersonal focus as well as the belief in human agency and free will. The general goal of cognitive social psychology is to conduct empirical research with the purpose of advancing the theoretical knowledge pool as it relates to the antecedents as well as the consequences of human behavior within a social construct. This knowledge should also provide a foundation on which a true understanding of the inextricable link between behavior and the social context can be built and advanced. In general, the ultimate goal of cognitive social psychology resea rch is to impact behavioral changes by establishing an empirically-based testing ground for theoretical ideas. The experimental studies within this field typically originate with a real-life and testable phenomena such as obedience, discrimination and prejudice. One of the most the most poignant studies within the field is the obedience studies conducted by Stanley Milgram. This study is controversial in that its utilization of deception raised ethical concerns and it was responsible for the establishment of new standards with regards to the treatment of human subjects. Milgram asked each of the student participants to fulfill "teaching" duties in a learning task. The participants were commanded to carry out an authority's orders, and were led to believe they were delivering an electric shock each time the "learner" made a mistake. In the standard baseline condition, no one quit before 300 volts, and 65% of participants continued to obey the experimenter to the highest level available, 450 volts. Unlike research involving hypothetical authority situations, Milgram's behavioral studies indicated that adults from civilian groups could indeed be induced to comply with noxious demands of authority. Discursive social psychology in contrast to cognitive social psychology examines how people make sense of their world through their mutual engagement with each other. In so doing, it develops its methodology from the philosophy of language and the utility of common psychological sense in order to understand mainstream topics in both social and cognitive psychology. Essentially, discursive psychology has been utilized to explore the ways in which reality is constructed within the society. The topics of study which prove to be applicable for discursive methods include the study of memory, attribution and attitudes. Most recently discursive psycho