Money_Market_Primer

Money_Market_Primer - A Money Market Primer First we...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
A Money Market Primer First we consider the Supply Side of this Market. For each of the exercises below, BEFORE YOU BEGIN CLICKING THE MOUSE, describe the impact of the event shown on Legal Reserves, Excess Reserves, Desired Excess Reserves (if applicable), Loans, Deposits, and the Supply of Money and Credit. Predict what the impact of this event will be on the graph shown. Now click away. Is your description (and prediction) correct?
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Review of Money Supply r M-2 M s EVENT: Public deposits currency into demand deposits r 0 M 0 Ceteris paribus, deposits of currency by the public  into Demand Deposits, or Checking Accounts  increases bank reserves. Reserves and Excess Reserves in Commercial  Banks rise. Bankers increase loans (and/or acquire  securities).   Deposits rise.  Money is created as  loans are made. The supply of money and credit increases. M s M 0
Background image of page 2
Review of Money Supply r M-2 M s EVENT: Increase in the market rate of interest r 0 M 0 Ceteris paribus, an increase in the market rate of  interest, at which loans can be made, increases  the opportunity cost of excess reserves. The level of desired excess reserves in commercial  banks decreases. Bankers increase loans (and/or acquire  securities).   Deposits rise.  Money is created as  loans are made. The quantity supplied of money and credit  increases. r 1 M 1
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Review of Money Supply r M-2 M s EVENT: Transfer of balances from Time Deposits to Demand Deposits r 0 M 0 The public wishes to hold more of its money in  checking accounts, less in savings accounts. Legal Reserves remain unchanged, but required  reserves increase. Excess reserves decrease. The  required reserve ratio for demand deposits is  higher than the required reserve ratio for time  deposits. As old loans are paid off, bankers make fewer  new loans.  Deposits fall. The supply of money and credit decreases. M s M 0
Background image of page 4
r M-2 M s EVENT: Increase in Banker Uncertainty r 0 M 0 If bankers become more uncertain regarding  future deposits and withdrawals, desired excess  reserves will increase. There is no immediate effect on legal reserves or  excess reserves.   However, because bankers want to hold more  excess reserves, as old loans are paid off, bankers  make fewer new loans.  Deposits fall. The supply of money and credit decreases.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/18/2011 for the course ECON 415 taught by Professor Holland during the Spring '09 term at Purdue University.

Page1 / 22

Money_Market_Primer - A Money Market Primer First we...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online