Unformatted text preview: liabilities owed by the bank. Open market operations: the buying or selling of bonds by the central bank (the Fed). The Link Between Reserves and Deposits Reserves = (Reserve Ratio) Deposits Rearranging the equation, we get
(1) Reserves Deposits = Reserve Ratio The Link Between Reserves and Deposits The equation shows that any increase in reserves will be multiplied by the inverse of the reserve ratio. If the reserve ratio is 0.1, then the increase in deposits is multiplied by 10. How the Fed Controls the Money Supply: Currency + Deposits
The Fed must keep track of how much currency people want to hold relative to deposits. If deposits relative to currency are falling, the Fed responds by increasing the reserves. This move increases deposits and the money supply. The Quantity Equation of Money
Quantity equation of money: the equation relating the price l...
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- Spring '10
- Monetary Policy, Federal Reserve System, Fed