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Unformatted text preview: 7/6/2009 1 MONETARY POLICY, PART II MONETARY POLICY, PART II JULY 6 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today b Midterm Exam Debriefing b Course Evaluation Debriefing b The Market for Reserves b The Effects of Monetary Policy b Targeting b Monetary Aggregates b Interest Rates b Homework #4 Distributed Midterm Exam Debrief b Exam Statistics b Average: 83.46% b Maximum: 97.7% b Exam Solutions Posted Online b Look them over, compare with your own. b Remember Final Exam is cumulative b Fed Extra Credit b point for every 4, rounded up b point for North Carolinas Federal Reserve Bank Course Evaluation Debrief b Homework Quizzes b Generally, the class preferred these to alternatives, but. b Some indicated theyd like to be able to show work, especially on multiple choice questions. b Laurens proposed improvement: b If youd like to show work, attach it and indicate that youve done so on the quiz question itself b Incorrect answers with correct work will receive partial credit. Course Evaluation Debrief b Lecture Suggestions b More Sample Homework and Quiz Questions in class b Will do! (as much as we can) b Other suggestions? Let me know! Recall from last time b All banks maintain deposits with the Fed, known as reserves . b Any reserves deposited with the Fed beyond the required reserve ratio are known as excess reserves . b Open market purchases increase the money supply, while open market sales decrease the money supply. b An increase in the amount of discount loans by the Fed leads to an increase in reserves, and an expansion of the money supply. 7/6/2009 2 Establishing the Federal Funds Rate The Market for Reserves Some terms to remember b The federal funds rate is the interest rate at which banks make overnight loans of reserves to one another. b Reserve requirements are the regulations that mandate a certain fraction of reserves be kept by each bank at the Fed. b Nonborrowed reserves (NBR) are those that are supplied by open market operations b Borrowed reserves (BR) are the reserves directly borrowed from the Fed through discount lending. The Demand for Reserves b Remember that the amount of reserves held by a bank can be split into 2 components: b Required Reserves b Excess Reserves Insurance against a reduction in deposits. b Holding excess reserves involves opportunity cost b Could have earned interest by lending them out b As the federal funds rate decreases, the opportunity cost of holding excess reserves falls . The Demand for Reserves b What does this imply about the demand curve for reserves? b Demand curve slopes down because as i ff , excess reserves and R d increases....
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- Summer '08
- Monetary Policy