lec16_monetary_policy.pdf - ECON 3040 Intermediate...

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Prof. Mathieu Taschereau-DumouchelECON 3040Intermediate Macroeconomic TheoryLecture 16: Monetary Policy and the FED: Part 11
TodayMonetary Policy TransmissionFractional Reserve BankingMonetary policy instruments and the conduct of the FedThe term structure of interest rates with risk2
Principles of Money Supply Determination3 groups of agents affect money supplyThe Central BankDepository InstitutionsPrivately own banks and thrift institutionsAccept deposit from and make loans to the publicThe publicEvery person or firm (except banks) that hold money as currency or as deposits in banks3
Principles of Money Supply DeterminationFederal ReserveBalance Sheet :Consolidated Balance Sheet of Banks:4AssetsLiabilitiesSecuritiesCurrency in circulationGoldCash in Banks’ VaultReserve depositsAssetsLiabilitiesVault cashDepositsReserve depositsLoans
Principles of Money Supply DeterminationBank reservesLiquid assets held by banks to meet demand for withdrawals and checks drawn on accounts100% reserve bankingBank reserves = Bank depositsFractional reserve bankingBank reserves < Bank depositsBanks lend out some of their depositsLeads to Money MultiplierReserve-Deposit Ratio = Reserves divided by DepositsMonetary Base: Reserve Deposit + Currency + Vault CashMoney Supply: Currency + Bank Deposit5
Quick example…Suppose John deposits $100 in a checking account at Bank A and Bank A then gives the money to Mary as a loanWhat is the monetary base?What is the money supply?6
Notice Assets= LiabilitiesReserve-Deposit Ratio = 300 / 3000 = 10%77Federal Reserve BankAssetsLiabilitiesSecurities $900Currency in circulation $700Gold 100Vault cash 100Reserve deposits 200Consolidated Balance Sheet of Banks AssetsLiabilitiesVault cash $100Deposits $3000Reserve deposits 200Loans 2600Securities 100
An Open Market OperationFed purchases $100 of bonds from Barclays CapitalThe Fed gains a security and credits the account of Barclays Capital by $100Barclays now has a lot of reserve and can make additional loan.This additional loan is deposited in a bank8
The Money MultiplierFed purchases $100 in bonds from Barclays9Federal Reserve BankAssetsLiabilitiesSecurities +$100Currency in circulationGoldVault cashReserve deposits +$100Consolidated Balance Sheet of Banks AssetsLiabilitiesVault cashDeposits +$100Reserve deposits +$100Loans +100Securities -100
The Money MultiplierThe new Balance sheet is10Federal Reserve BankAssetsLiabilitiesSecurities $1000Currency in circulation $700Gold 100Vault cash 100Reserve deposits 300Consolidated Balance Sheet of Banks AssetsLiabilitiesVault cash $100Deposits $3100Reserve deposits 300Loans 2700 Securities 0
The Money Multiplier

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