Base Multiplier Approach to Money Supply

Base Multiplier Approach to Money Supply Traditionally, it has been shown controversially that money supply is determined using the base multiplier approach. The multiplier model of the money supply, originally developed by Brunner (1961) and Brunner and Meltzer (1964) has become the standard model to explain how the policy actions of the Central Bank influence the money stock  [1]. However, there is more than sufficient evidence to suggest that monetary authorities do not determine the money supply and that the flow of funds approach makes more sense. Consequently, I will compare and contrast the base multiplier and the flow of funds approaches to the determination of money supply and determine which occurs in reality in view of the present economic climate. Under the base multiplier approach, the monetary authority (Bank of England) sets the size of the monetary base, which in turn determines the stock of broad money as a multiple of the base.  [2]  This process is described below: Ms = Cp + Dc (Equation 1) In the equation above, Ms refers to the broad money supply, Cp refers to private sector (excluding banks) notes and coins and Dc refers to bank deposits. The next equation is for the monetary base (B) is as follows: B = Cb + Db + Cp (Equation 2) In Equation 2, Cb refers to banks notes and coins while Db refers to deposits with the Bank of England. Both combined they can be called reserves R and can be substituted into the equation above to form Equation 3. B = R + Cp (Equation 3) The quantity of money can now be expressed as a multiple of the base as follows:  [3]   (Equation 4) The next stage is to divide through by bank deposits to obtain the Equation 5 as follows: If = ÃŽÂ ± and = ÃŽÂ ², then the equation above becomes Equation 6 below: The symbol ÃŽÂ ± is the private sectors cash ratio, while ÃŽÂ ² represents bank reserves. Under the multiplier approach the money supply equation is then obtained by multiplying both sides of the equation with the monetary base B. Therefore, Equation 7 becomes: The rationale behind this is that assuming ÃŽÂ ± and ÃŽÂ ² are fixed or stable, the money supply is a multiple of the monetary base and can change only at the discretion of the authorities since the base consists entirely of central bank liabilities. The Flow of Funds approach says that money supplied is determined by open market operations. It presents the opposite view to the multiplier approach as those in favor believe that other factors determine the supply of money, not monetary authorities or policymakers, it looks at the demand for money not just the supply side. They also believe that banks are able to obtain reserves from central banks as required and are not a constraint. Under this approach credit or loans credit by the private sector create deposits and not the other way round as put forward by the base multiplier approach. The flow of funds model of money supply determination is as follows: Ms = Cp + Dc, the same definition of broad money supply as was used in the base multiplier approach (Equation 8) The next equation focuses on the changes in money supply, i.e: ΆMs = ΆCp + ΆDc (Equation 9) A change in deposit is matched by a corresponding change in loans, which can be further divided into loans to the private sector (Lp) and loans to the UK government (Lg): ΆDp = ΆLoans = ΆLp + ΆLg (Equation 10) Equation 9 could therefore be re-written as Equation 11 as follows: ΆMs = ΆCp + ΆLp + ΆLg The flow of funds approach was developed at a time when the UK government needed to borrow from banks to meet its requirements as issuing bonds was not sufficient. This had stopped being the case for a while, as the UK government was able to meet its requirements solely through the issue of bonds. Consequently, ΆLg can be further broken down to take into effect the monetary implications of the public sector deficit:  [4]   ΆLg = PSNCR ΆCp ΆGp + Άext (Equation 12) PSNCR stands for public sector net cash requirement; ΆGp represents sale of government bonds to the general public and Άext represents the monetary effect of official transactions in foreign exchange by the central bank (and this is equal to zero in a floating exchange rate regime)  [5]   Consequently, by substituting Equation 12 into Equation 11, obtains: ΆMs = ΆCp + ΆLp + PSNCR ΆCp ΆGp + Άext, which becomes Equation 13 as follows: ΆMs = PSNCR ΆGp + Άext + ΆLp Equation 13 shows a link between loan demand and the state of the economy.  [6]  As the total amount of goods and services produced within an economy grows, the demand for credit and a corresponding will also increase to finance the growth according to the flow of funds model. Deposits will also grow to match the increase demand. The differences of opinion between those in favor of the base multiplier approach and the flow of funds approach comes from how they view how money supply is determined. The base multiplier approach believes that money supply is exogenously determined while the flow of fund approach believes it is endogenously determined. Despite the differences, they do agree on the concept of the Quantity Theory of Money (QTM). QTM states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold.  [7]  Heakal explains that if the amount of money in an economy doubles, price levels also doubles causing inflation. The consumer therefore pays twice as much for the same amount of the good or service.  [8]   The theory is denoted by the Fisher Equation: MV = PT; where M is the money supply, V is the velocity of circulation (i.e. the number of times money changes hands in an economy)  [9]  ; P is the average price level and T the volume of transactions of goods and services. Both approaches agree on the formula but disagree on the assumptions. In the case of the base multiplier approach, Friedman believes that V is constant (http://www.risklatte.com/BraveEconomist/02.php), and T is constant in the short term, while the flow of funds approach believes that V is a variable, with their rationale being that since consumer and businesses spending needs determine the number of times money changes hands in the economy, then V cannot be constant. While there is agreement that there is a direct relationship between the money supply and the level of prices of goods and services sold, the nature of that relationship is disputed. The base multiplier approach goes on the assumption that a change in money supply directly influences price levels and/or a change in supply of goods and services.  [10]  The endogenous argument believes the relationship works the other way round, i.e. that changes in price levels or in supply of goods and services results in changes in the money supply. So instead of the money supply being determined by the monetary authorities as the base multiplier approach believe, the flow of funds approach believe that it is actually interest rates that determine the money supply. Consequently, the role central banks or monetary authorities have played is only to set interest rates and let the commercial banks and consumers do the rest through demand and supply. In reality, it is clear that the endogenous view is more viable. In terms of velocity of circulation, statistical analysis shows that v rises during booms and deregulation and falls during slumps and reregulation  [11]  , therefore, making redundant the argument of people like Friedman that v is constant. Furthermore, the role of the central bank as a lender of last resort makes their ability to control the money supply almost impossible.  [12]  This is because they are guaranteed to provide funds to commercial banks as appropriate. This was seen in numerous instances during the recent global recession. For example, at the start of the economic crisis in 2007, the Chancellor of the Exchequer authorised the Bank of England to provide a liquidity support facility to Northern Rock against appropriate collateral and at an interest rate premium. This liquidity facility will be available to help Northern Rock to fund its operations during the current period of turbulence in financi al markets while Northern Rock works to secure an orderly resolution to its current liquidity problems  [13]. We have seen that the two approaches to money supply determination are influenced by the exogenous and endogenous views. The exogenous view lends credibility to the base multiplier approach and asserts that an external agent monetary authorities or the policymaker determines the supply of money, while the endogenous approach believes this is done through open market operations. The only way the policymaker intervenes, according to endogenous views is by setting interest rates. Thereafter, the commercial banks and their customers take over the process which of demanding and supplying credit which ultimately determines the money supply in an economy. The base multiplier approach will never and has never been used, the flow of funds model is thought of as being a better model for the money supply as it takes account of demand and supply. In reality the endogenous approach of the flow of funds is at work. Contrary to the exogenous approach insinuating that the money supply is independent of interest rates, the endogenous approach believes that the higher the demand for loans the higher the interest rates which encourages banks to lend more. Therefore modern economies recognise that the policymaker sets short-term interest rates and the quantities of money and credit are demand-determined.

Heidi Roizen Case Essay

1. Describe Roizen’s network (including her reasons for developing her network) and how she developed it. Roizen’s young adult life shaped the reasons as to why she was going to become independent and self-sufficient. After suffering the tragic loss of her fiancà © she set out to build a career and learned very early on that building connections with high-level people was something she had a talent for and something she ought not to miss out on when given the opportunity. Roizen knew she wanted to be in the technology industry, but with a creative writing degree she had limited options of jobs to choose from. At Tandem computers she wrote the internal newspaper serving as a link between the executives (including the CEO) and the rest of the employees. Roizen immediately realized how to leverage this aspect of her job description and thus began a decade long career of networking. After Tandem Roizen went to get her MBA and then partnered with her brother to launch a company that sold spreadsheet software he developed. T-Maker did not have excessive amounts of capital like some of its competitors, but Roizen knew that with her outgoing personality and her desire to meet (interesting and smart) people she could make the company successful. While marketing T/Maker she made important relationships with people that would end up shaping her career as well as dominating the Silicon Valley technology scene. Roizen was taking a gamble spending so much of her time and energy in developing rapport with these people, but thus far it had proven to be an integral factor in her career development. 2. What are Roizen’s principles of networking and relationships? How would you analyze the strengths and weaknesses of her network as we see it at the end of the case? Because of the amount of time and energy Roizen devotes to networking over time she developed guiding principles to maintain stability. Firstly Heidi claims you must have access to people, which is accomplished over a period  of time. Also held at high regard is maintaining â€Å"performance and consistency during and after each interaction.† Performance involves responsiveness and follow-through in doing what you offered or agreed upon doing. By focusing on performance and consistency Roizen believes that efficiency in maintaining relationships is achieved because interactions of high levels of substance can occur with less frequency. During Roizen’s time at Apple she adopted her next principle, which stressed neutrality and confidentiality in her relationships with competitors. While she did not explicitly state that trust was necessary most people cited in the case seemed to truly trust Roizen and her intentions, which brings us to her last and perhaps most importa nt principle of reciprocity. Roizen values reciprocity in the sense that before calling in a favor she must evaluate if it is a win-win situation for both parties. Heidi has been referred to as a catalyst, market maker, and door opener so before she can do something for someone else she wants to make sure there are mutual benefits to be realized. Heidi is a high-profile industry captain who frankly does not have the time to perform acts of goodwill all day. Her networking is the bulk of her business and her resume. The strengths of her network are that throughout her career and specifically at Softbank her networking landed her the position of partner. Before evaluating the strengths of Roizen’s network one must take the time to recognize that it takes a certain ebullient, patient, conscientious, amicable human being to be able to achieve a network with the wide spectrum of powerful individuals that Roizen began amalgamating at a very young age. The strengths of her network include penetrating the Technology sector and becoming a celebrity of Silicon Valley. Through her network she was able to leverage these relationships to benefit her herself and others along the way. By establishing her guidelines she was able to healthily separate work and her personal life even though an outsiders’ perspective may think theses boundaries are blurred in the case of Roizen’s dinner parties. It is quite apparent that much of Roizen’s success can be attributed to her expertise in the area of networking. She has positively leveraged this unique skill throughout her career to make win-win situations for both herself and the other party involved. Unfortunately networking does come  with some downside. It is overwhelmingly time consuming. As the case mentioned Roizen receives upwards of 100 e-mails a day that she feels obliged to personally answer in order to maintain successful work-related (and sometimes personal) relationships. An acquaintance mentioned the lengthiness of her e-mails decreased over time until the responses were incomplete sentences. This reflects poorly on Roizen because the 2000+ people she networks with all consider her a â€Å"friend† and expect perhaps more than she can provide them with in terms of time and energy devoted to the relationship. Besides the work-related strains this networking seeps into her personal life where she is constantly hosting events at her home, leaving little separation between home and work. Overall the networking doesn’t allow for a balanced work life, which many people claim to be essential in achieving overall happiness and even success. 3. How does she use her network, and what does she achieve through her network? Heidi realized at her first job at Tandem that she had to use her talent of being a people-person to move up in this world. She had a good eye for how to manipulate situations into the interests of her network. Starting with T/Maker she started maximizing all social situations to the benefit of marketing T/Maker. The time she spent developing these relationships during the 1980’s laid out the foundation of her network and consequently her career. Then during Apple’s decline of the 1990’s Roizen was called to the rescue where first the first time she was to formally use her network in the developer community to rebuild a brand. Her success was primarily attributed to her relationships and how she was able to effectively use them to her benefit and in this case in Apple’s benefit. Her work awarded her a promotion to build strategy and eventually to leave and create her own job description as a mentor capitalist. This is Heidi using her network at its finest. Heidi realized what she had built was unique and consequently her network gave her the ability to tailor her job description around her likes and strengths. As an independent and external director she was responsible for recruiting key positions and with her probable one-degree of separation between her and the rest of Silicon Valley she was able to make some impressive matches. It is one thing to have developed the network Heidi has,  but is another to know how to perfectly utilize its full potential and Heidi has done so throughout the course of her career. Moving to the venture capital world allowed Heidi to fulfill an interest in the equity ownership or the â€Å"financial weight† of these start- up companies. With this career change came additional responsibilities that would take away from the time Heidi had previously spent networking. Now it is up to Heidi to re-prioritize and arrange her duties to create a healthy balan ce of completing her venture capitalist duties, while retaining the network she so dutifully built. 4. How would you characterize the â€Å"breadth† and â€Å"depth† (strong or weak ties) of her network? Part of Heidi’s networking phenomenon involves a metaphor of networking as constellations. Heidi can minimize relationship maintenance by staying in more frequent contact with other nuclei of network constellations. Heidi over the years has assumed position of nuclei in her particular networking group and this gives her the ability to â€Å"leverage the network constellation approach† which results in preserving the breadth of her entire network. Her network spans thousands of people who all consider themselves personally acquainted with Heidi. There is not enough time in the day to cater to each individual so Heidi cuts corners by remaining in close contact with the nuclei of all the different networks she is a part of. Heidi also has depth to her network in the sense that she keeps in touch with non-nuclei of other networks. Heidi is most definitely a people person and over the course of her career she has gotten to know people who she likes as individuals because they are interesting and smart (two of her pre-requisites in networking!) That being said the depth of her network may seem to contradict with maintaining the breadth through the constellation approach, but Heidi’s networking is deeply instilled in her so she sees value in her relationships with the nuclei and the random individuals. And thus far her hybrid approach has proven to be successful in all of her career-driven endeavors. 5. What are your suggestions for Roizen to continue to develop and maintain her network? Should she change anything in terms of people, effort, strategies, etc? In order to effectively exploit Heidi’s strengths I would suggest that since she seems to have flexibility in designing her job she could cut down the time she spends reading business plans for a few reasons; she does not enjoy that aspect of venture capital and because she could use that time to network which is a main reason why she was hired. Currently Heidi does not have enough time to evaluate business plans, help companies in early growth stages and to maintain her networking relationships. If Softbank wants to be able to take advantage of Heidi’s rolodex they will have to agree to her requests to be able to keep up her relationships. Fortunately most executives understand how time consuming networking can be and when it is done at Heidi’s level it should be deemed a full time job. I understand Heidi’s reasons for wanting to spend time with the business plans, but by delegating an initial screening process downward in the organization she may find herself with an extra few hours each day to complete time-sensitive networking issues, which would ultimately increase her performance and effectiveness.

Conversation Starter Essay

Keeping pace with the rapidly growing health care industry has been a challenge for human resource (HR) professionals. Increasing health care costs, aging workforce primed for retirement over the next decade, and regulatory complexity will be prevalent challenges for human resources. (Minton-Eversole, 2011). Responding to the effects of health care reform, and counseling organizations on which actions to take are an unrelenting concern for management in human resources (Minton-Eversole, 2011). Health care providers are feeling the pressure as the industry moves to an accountable care model. With reimbursement contingent on patient satisfaction and safety, cost containment is more important than ever (Aberdeen Group, 2012). Providers are leaning on HR management to ensure their workforce is prepared to meet the challenges. Identifying and promoting talent within the organization, formal succession planning, and leadership programs can give organizations the advantage in an ever-changing industry (Aberdeen Group, 2012). Recruitment and retention of competent, skilled candidates that meet mandatory staffing ratios adds to the list of challenges HR professional will face (Aberdeen Group, 2012). Lacking qualified applicants to fill positions within the organization, human resources have turned to training and development to heighten the skills of current qualified workforce, while offering desirable salary and benefits packages to retain young workers (Minton-Eversole, 2011). Anticipated changes in demographics and social conditions will greatly influence the approach taken by HR professionals with the millions of individuals reaching retirement age. (Minton-Eversole, 2011). Many of these individuals in the workforce are not prepared financially for retirement; eliminating the chances for younger recruits to enter the profession (Minton-Eversole, 2011). Forecasted replacement needs will more than double the job openings  created by economic growth between 2008-2018 (Minton-Eversole, 2011). Knowing where the retirements will occur, and if there will be sufficient resources to replace them, will be the imposing challenge (Minton-Eversole, 2011). Human resource departments are engaged actively in employing and development of the strategies that will influence the health care industry. Reducing costs, improving patient care as well as safety, recruitment and retention of qualified applicants will be unfeasible for health care providers without active HR management in the organization. References Aberdeen Group. (2012). Aberdeen Group. Retrieved from http://htpp://blogs.aberdeengroup.com Minton-Eversole, T. (2011). Society For Human Resources Management. Retrieved from http://www.shrm.org

The Indonesian Forest Holocaust - 3277 Words

The Indonesian Forest Holocaust Marianne Phan Introduction The tropical rainforest of Indonesia was once the most biologically diverse forests in the world. Its rainforests accounted for 10% of the world’s plant species, 12% of the world’s mammal species, 16% of reptile species and 17% of the bird species (Hamilton 1996). In the late 1960s, commercial exploitation of Indonesia’s natural forests became a means to boost economic development under the Suharto’s regime by enabling the government to issue logging concessions. However, the lack of natural resource management of its natural forests caused backlash from locals and international communities led to the downfall of the Suharto regime in 1998 (Yasmi, Guernier Colfer 2009).†¦show more content†¦The first section of the essay will provide an overview of the issue and the vicious cycle contributing to the depletion of Indonesian tropical forests. The second section will investigate into the current regulations implemented by the Indonesian government t o regulate the environmental impacts of deforestation. The essay will then conclude by examining the business opportunities and risks that arises from this regulatory system. The deforestation epidemic in Indonesia The detrimental effects of deforestation Ongoing practices of deforestation will cause detrimental effect on the entire ecosystem throughout Asia and the world. It is evident that deforestation contributes a substantial volume of carbon emissions globally, with deforestation in most developing countries accounting for approximately 30 percent of global emissions (Johnson 2009). Dense atmospheric CO2 concentrations from land clearing and logging will produce too much carbon dioxide to linger in the atmosphere. Moreover, forest fires are resulting from deforestation as moisture from the soils are dried up, therefore causing further destruction of forests (Mongabay 2006). Once the trees are burnt, it will also release leftover carbon that was previously stored as carbon dioxide within it. This will lead to greater concentration of carbon dioxide in the atmosphere which would then modify the surface temperature due to the creating a