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Unformatted text preview: laws. The ways in which these tools of monetary policy affect the supply of money are discussed in detail below. COMPONENTS OF THE MONEY SUPPLY
In judging the adequacy of the money supply, the Federal Reserve is concerned with its overall size, not with its components – currency and deposits. It attempts to
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accommodate any changes in the public's preference for using currency rather than checking accounts to make payments. If the public wants to hold more currency and fewer deposits, for example, the Federal Reserve will simultaneously provide more currency to banks for their customers and drain enough reserves from the banking system to ensure that deposits tall by the increase in currency outstanding. In this way, it keeps the total amount of money–currency plus deposits – unchanged. OPEN MARKET OPERATIONS
Open market operations affect non–borrowed reserves–those not provided by the Fed through loans to depository institutions. Non–borrowed reserves typically account for about 98% of total reserves. Since open market operations are the major source of changes in non–borrowed reserves, they comprise the Fed's principal instrument for controlling total reserves. Open market operations for the Federal Reserves System are carried out by the Trading Desk of the Federal Reserve Bank of New York. An example of such operations is when the Trading Desk makes an open market purchase of a government security from a government securities dealer (which is a specialized financial firm engaged in the buying and selling of government securities). The New York Federal Reserve Bank pays for these securities with a check drawn on itself. When the securities dealer deposits this check in its account at a commercial bank, the bank will send the check for collection to the Federal Reserve Bank which honors it by simply crediting the bank's deposit account with itself. The commercial bank gains additional reserves because its deposits at the Federal Reverse Bank count as reserves. An open market...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10