Chapter 13 - Macroeconomic Policy Fundamentals Chapter 13...

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Macroeconomic Policy Fundamentals Chapter 13
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Discussion Topics Characteristics of money Federal Reserve System Changing the money supply Money market equilibrium Effects of monetary policy on economy The federal budget deficit The national debt Fiscal policy options
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Functions of Money Medium of exchange – facilitates payment to others for goods and services Unit of accounting – assessing profitability of businesses, household budgets and aggregate variables like GDP Store of value – money is a liquid asset which has value in investment portfolios and cash flow decisions of businesses and households Page 299
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Functions of the Fed 1. Supply the economy with paper currency 2. Supervise member banks 3. Provide check collection and clearing services 4. Maintain the reserve balances of depository institutions 5. Lend to depository institutions 6. Act at the federal government’s banker and fiscal agent 7. Regulate the money supply Page 302-303
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Page 301 Location of the 12 District Federal Reserve Banks
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Changing of the Guard Alan Greenspan Ben Bernanke
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The Fed’s Policy Tools Reserve requirements – depository institutions are required to maintain a specific fraction of their customers’ deposits as reserves. Discount rate – rate depository institutions pay when they borrow from the Fed Open market operations – Fed can buy or sell government securities to alter the money supply Page 304 – 305
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Page 303 Role of the Board of Governors of the Federal Reserve System
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Page 303 Role of the Board of Governors of the Federal Reserve System
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Page 303 Role of the Board of Governors of the Federal Reserve System
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Page 303 Key role played by the Federal Open Market Committee or FOMC
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Recent Fed Rate Actions WOW
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Page 303 Role of the 12 District Federal Reserve Banks located throughout the country
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Determinants of the Money Supply
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Page 309 Existing money supply curve. Note it is perpendicular to the quantity axis, implying it is unaffected by the interest rate.
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Page 309 Expansionary monetary policy actions will shift the MS curve to the right over a period of 12 months or so.
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Page 309 Contractionary monetary policy actions, on the other hand, will shift the money supply curve to left over a similar time period.
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Page 307 Suppose a depositor in Bank Ag sells $1 million in government securities to the Fed. He then deposits the proceeds from the sale in his bank. If the fractional reserve requirement ratio is 20 percent, Bank Ag can increase the volume of its loans by $800,000. Suppose the proceeds of these loans are deposited in Bank B. Follow the trail to the Total line.
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Change in the Money Supply We can skip tracing deposits through the economy by using the following money supply (M S
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This note was uploaded on 12/01/2010 for the course AGEC 105 taught by Professor Capps during the Summer '08 term at Texas A&M.

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Chapter 13 - Macroeconomic Policy Fundamentals Chapter 13...

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