econ_100B-16 - ECONOMICS 100B Professor Steven Wood Lecture...

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ECONOMICS 100B Professor Steven Wood 10/21/08 Lecture 16 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. *Note: Reference to Professor Wood’s Power Point Slides today will be noted as (16-1), for “Power Point #16: Monetary Policy and the Federal Reserve System Part 1, Slide #1.” LECTURE Today we want to talk about monetary policy and Federal Reserve systems in more detail. We essentially assume that Central Bank would change the nominal monetary supply which would change the LM curve and we would move to the new equilibrium. That is the simple story. So we will fish out some subtleties and details about how the central bank will go about in doing that. When we’re done with this, we will see that the federal deserve does not, as we assumed, control the nominal money supply directly. Rather, they do this indirectly, and because of its indirectness, what the Federal Reserve wants to happen can be very different from what actually happens. Today we want to look at three issues. How is money supply in the medium of exchange actually created? Where does money come from? After addressing this, we will talk about the Federal Reserve systems and the money policy tools. When we think about money creation, it turns out that there are three primary players. One is the central bank itself. Harkening back to what we did last week, central bank is probably the most important player in the money creation game, but it’s not the only one. The second important group of institutions involved in money creation is depository institutions, which most of us refer to as banks. Banks take deposits from individuals and businesses and make loans at higher interest rates. The third major player is the public. That’s you and me and the businesses out there. The public is those who actually carry bills and coins. So when we think about what is influencing the money supply, we actually need to think about all three of these groups and how they might/might not change their behavior. Previously we talked about the central bank directly changing the money supply. In fact, they don’t. They instead change the monetary base, or high- powered money. The central bank can actually print money. By automatically debiting private parties’ bank account, the central bank prints money electronically. So in essence they have created money out of thin air. When the central bank does that, it is buying real assets from the public. Up until recently, the vast majority of these real assets have been treasury bills, notes, and bonds. When they do, the money gets into circulation and as long
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This note was uploaded on 11/15/2008 for the course ECON 100B taught by Professor Wood during the Fall '08 term at Berkeley.

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econ_100B-16 - ECONOMICS 100B Professor Steven Wood Lecture...

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