Chapter 15 Outline

Chapter 15 Outline - Department of Economics South Dakota...

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Unformatted text preview: Department of Economics South Dakota State University Chapter 15: Tools of Monetary Policy Econ 330: Money and Banking Fall 2007 Prof. Joseph Santos This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation. Department of Economics South Dakota State University [1] Demand for Bank Reserves • The demand for reserves is comprised of depository institutions’ demand for required reserves plus their demand for excess reserves. • As the federal funds rate decreases, the opportunity cost of holding excess reserves falls and, ceteris paribus, the quantity of reserves demanded rises. • Consequently, the demand curve for reserves slopes downward. [1] Demand for Bank Reserves [2] Supply of Bank Reserves [3] Reserve Market Equilibrium [4] Tools of the Fed [5] Open Market Operations [6] OMO – Reserve Market Response [7] Discount Policy [8] DP – Reserve Market Response [9] Reserve Requirements [10] RR – Reserve Market Response This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation. Department of Economics South Dakota State University [2] Supply of Bank Reserves • The supply curve for reserves is comprised of two components; the first is non-borrowed reserves, which are supplied through open market operations, and the second is discount loans, which are supplied through discount loans. • The primary cost of borrowing discount loans from the Fed is the discount rate. Because borrowing federal funds is a substitute for taking out discount loans from the Fed, if the federal funds rate is below the discount rate, then depository institutions will not borrow from the Fed and discount loans will be zero. – The supply of discount loans is perfectly elastic at the discount rate. [1] Demand for Bank Reserves [2] Supply of Bank Reserves [3] Reserve Market Equilibrium [4] Tools of the Fed [5] Open Market Operations [6] OMO – Reserve Market Response [7] Discount Policy [8] DP – Reserve Market Response [9] Reserve Requirements [10] RR – Reserve Market Response This outline draws from Frederic Mishkin’s...
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This note was uploaded on 04/09/2008 for the course ECON 330 taught by Professor Santos during the Spring '08 term at SD State.

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Chapter 15 Outline - Department of Economics South Dakota...

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