June 30-1 - Open Market Operations (OMOs) (Review) The...

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Open Market Operations (OMOs) (Review) The Impact of OMOs on Interest Rates Economic Consequences of Fed Actions Some Jargon: Real vs. Nominal Interest Rates Basis Points New Fed Tools Implemented in the Crisis “Quantitative Easing” Banks in the Wake of the Crisis Equity Valuation Models
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Monetary Policy Expansionary Monetary Policy —actions which increase the money supply
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Monetary Policy Expansionary Monetary Policy —actions which increase the money supply Contractionary Monetary Policy —actions which decrease the money supply
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Tools of the Fed Open Market Operations The Fed Buys or Sells T-Bonds
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An Open Market Operation The Fed buys a $100,000 T-Bond from a bond dealer, and pays for it by electronic transfer of $100,000 to the bond dealer’s checking account
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An Open Market Operation The Fed buys a $100,000 T-Bond from a bond dealer, and pays for it by electronic transfer of $100,000 to the bond dealer’s checking account Consequently, the bond dealer’s bank’s balance sheet shows a $100,000 increase in reserves
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An Open Market Operation The Fed buys a $100,000 T-Bond from a bond dealer, and pays for it by electronic transfer of $100,000 to the bond dealer’s checking account Consequently, the bond dealer’s bank’s balance sheet shows a $100,000 increase in reserves Recall—reserves are an asset to the bank, but a liability to the Fed
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Fed Buys $100,000 Bond Fed’s Balance Sheet Assets (A) Liabilities (L)
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Fed Buys $100,000 Bond Fed’s Balance Sheet Assets (A) Liabilities (L) T-Bonds +100,000
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Fed Buys $100,000 Bond Fed’s Balance Sheet Assets (A) Liabilities (L) T-Bonds +100,000 Reserves +100,000
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Fed Buys $100,000 Bond Bond Trader’s Balance Sheet Assets (A) Liabilities (L) T-Bonds −100,000 Deposits +100,000
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Fed Buys $100,000 Bond Bank’s Balance Sheet Assets (A) Liabilities (L) Reserves +100,000 Deposits +100,000
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Fed Buys $100,000 Bond Δ Total Deposits = Initial Δ in Reserves 1 (R + E) × = $100,000 1 (.1 + 0) × = $100,000 1 (.1) × = $100,000 × 10 = $1,000,000
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Fed Buys $100,000 Bond Δ Total Deposits = $1,000,000 Δ Money Supply = Δ Total Deposits + Δ Cash held by the public = $1,000,000 + $0 = $1,000,000 Buying bonds is expansionary monetary policy
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An Open Market Operation The Fed sells a $100,000 T-Bond to a bond dealer, and the bond dealer pays for the bond by an electronic transfer of $100,000 from their checking account
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An Open Market Operation The Fed sells a $100,000 T-Bond to a bond dealer, and the bond dealer pays for the bond by an electronic transfer of $100,000 from their checking account Consequently, the bond dealer’s bank’s balance sheet shows a $100,000 decrease in reserves
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An Open Market Operation The Fed sells a $100,000 T-Bond to a bond dealer, and the bond dealer pays for the bond by an electronic transfer of $100,000 from their checking account Consequently, the bond dealer’s bank’s balance sheet shows a $100,000 decrease in reserves Recall—reserves are an asset to the bank, but a liability to the Fed
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Fed Sells $100,000 Bond Fed’s Balance Sheet Assets (A) Liabilities (L)
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Fed Sells $100,000 Bond Fed’s Balance Sheet Assets (A) Liabilities (L) T-Bonds −100,000
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Fed Sells $100,000 Bond Fed’s Balance Sheet Assets (A) Liabilities (L) T-Bonds −100,000 Reserves −100,000
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Fed Sells $100,000 Bond Bond Trader’s Balance Sheet Assets (A) Liabilities (L) T-Bonds +100,000 Deposits −100,000
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Fed Sells $100,000 Bond Bank’s Balance Sheet Assets (A) Liabilities (L) Reserves −100,000 Deposits −100,000
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This note was uploaded on 10/21/2010 for the course ECON 1530 taught by Professor Ohly during the Spring '10 term at Dartmouth.

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June 30-1 - Open Market Operations (OMOs) (Review) The...

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