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Outline 5 - Professor Akacem UNIT FIVE Outline number 5...

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Professor Akacem UNIT FIVE: Outline number 5 Money Creation Chapter 17 I. Introduction: a. Review of the tools of Monetary Policy b. Who are the players? II. Multiple Deposit Creation: a. Example with a 100% Reserves b. Example with an "rr" less than 100% c. Case with an of rr=20% d. Fractional Reserve Banking III. Deposit Multiplier: a. Example b. Factors limiting Money Creation c. Leakages
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Professor Akacem Unit Five: Outline Five Money Creation Chapter 17 Your text goes through a lot of details and explanations of the process. Make sure you study your chapter well. We are covering the key elements as we did in a regular lecture but you need to review the details. I. Introduction: II. Multiple Deposit Creation: III. Deposit Multiplier: I. Introduction: a. Review of the tools of Monetary Policy: We briefly made a reference to monetary policy and open market operations in previous units. In this unit, we will cover the tools of monetary policy in more details. The Federal Reserve has Three main tools. These are: a. Open Market Operations b. Discount Rate c. Reserve Requirements Open Market Operations: They involve the buying and selling of government securities by the Fed in an attempt to regulate the money supply and credit conditions in the economy. It is the most common tool and the most used by the Fed. The Federal Open Market Committee that we talked about in the last Unit , carries out Open Market Operations . The committee sends a directive and the trading desk of the Federal Reserve Bank of New York executes the trades. The New York Fed's is the agency implements the buying and selling of government securities on behalf of the Federal Reserve (given its location and its ties with the all the primary dealers). Discount Rate: The discount rate is the rate of interest that the Fed charges to banks to borrow from its discount window, thus its name. The discount window is not a window that is meant to be abused by banks. If a bank over uses the window, it could get a call from the Fed and possibly watched (as well as penalized by a surcharged in some cases) a little more closely in terms of its asset portfolio and health in general. Also, over use of discount window privileges does get known and as soon as the information is public, it could have the potential to generate a "silent" run at first (silent, usually from the large depositors) and possibly a bank run later. However, with deposit insurance and the "too big to fail" doctrine that we talked about in past Units, we will see less of this. Reserve Requirements: The reserve requirements are the fraction of the incoming deposits that must be kept in cash by banks (depository institutions). For example, if the Reserve requirements are 10% (rr=10%), and $1,000 is deposited in a bank, it then has to keep $100 in cash. This role of this tool is to help the Fed manage the amount of money in the economy by changing how much banks can lend. We will go through some examples below using each one of the tools: Examples using the tools: Open Market Operations:
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