Lecture_12

Lecture_12 - Lecture 12 Econ 2 Tracking the Economy...

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Lecture 12 Econ 2
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Tracking the Economy
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Tracking the Economy
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Reserves and Deposits Suppose the reserve requirement is 20%. If the Fed buys $500 of Treasury bills, then deposits can A) increase by $500 B) decrease by $500 C) increase by $2500 D) increase by $5000
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Reserves and Deposits Suppose the reserve requirement is 20%. If the Fed buys $500 of Treasury bills, then deposits will C) increase by $2500
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Money and Prices Suppose M up 1% and V up 2% and Y up 3% then P: A) up 6% B) up 3% C) down 6% D) down 3% E) no change
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Money and Prices Suppose M up 1% and V up 2% and Y up 3% then P: E) no change
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Policy Tools Monetary policy ultimately involves alterations in the quantity of money, which directly means balance sheet operations that change the quantity of the monetary base.
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The Fed has three tools for implementing policy : Policy Tools many
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1. Change the required reserve ratio (which will alter the amount of reserves for a given amount of deposits). Policy Tools
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2. Change the quantity of direct lending through the discount window Policy Tools
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3. Change the quantity of reserves by engaging in purchases and sales government securities. Open market operations Policy Tools
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An Open Market Operation Suppose the Fed engages in an open market purchase of $100 million dollars of government securities.
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The Nonbank Public’s Balance Sheet Assets Liabilities Gov. Securities –100 mil. Deposits +100 mil.
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The Banking System’s Balance Sheet Assets Liabilities Reserves +100 mil. Deposits + 100 mil
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The Fed’s Balance Sheet Assets Liabilities Gov. Securities +100 mil. Reserves +100 mil.
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But policy decisions are, in the current environment, expressed in terms of federal funds rate targets.
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This is the interest rate the FOMC votes on every 6 weeks or so The federal funds market is a market for overnight bank loans. It essentially involves trades of reserves between depository institutions. The Fed Funds Rate
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The net demand for federal funds is downward sloping -- a lower funds rate increases the quantity that banks want to buy and lowers the quantity they want sell. Reserves and the Federal Funds Market
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Reserves and the Federal Funds Market Reserve Demand Quantity of Reserves ( R ) Federal Funds Rate ( i FF )
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overall supply of reserves is entirely determined by the central bank. Reserves and the Federal
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Lecture_12 - Lecture 12 Econ 2 Tracking the Economy...

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