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Class Notes - 10-29-07

Class Notes - 10-29-07 - Macroeconomics Class Notes Three...

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Macroeconomics – Class Notes – 10/29/07 Three Chief Fed Functions Regulate Private banking Banker’s bank – “lender of last resort” Monetary Policy Fed Tools Open-market Operations: Chief Fed tool Increase money supply, Fed buys government bonds (increases economic activity) Decrease money supply, Fed sells government bonds (cools economy off) Banks and Money Supply Bank behavior affects quantity of deposits Fractional Reserve Banking : Holding a fraction of money deposited as reserves and lend out rest. Fractional Reserve Banking Deposits received but not lent out are reserves Money supply affected by bank reserves and amount of deposits lent out. Loans are a bank asset
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How Fed Affects Money Supply Assume: o Reserve Ratio (R) is 10% (or 0.1) o Banks wish no excess reserves (they are lending out as much as they possibly can) First National Bank Assets Liabilities Reserves Deposits Total Reserve: $100 Required Reserve: $10 Excess Reserve: $90 Deduct $90
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