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Money_Market_Primer

Money_Market_Primer - A Money Market Primer First we...

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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?
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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
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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
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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
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Review of Money Supply 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.
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