Chapter03(1)

Chapter03(1) - Chapter - 3 The Fed and Interest Rates The...

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Chapter - 3 The Fed and Interest Rates
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The Monetary Base The monetary base comprises the Fed’s two largest liabilities Federal Reserve Notes & Depository Reserves Through Monetary Base, the Fed controls the MONEY SUPPLY
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What is money? Medium of exchange Store of value Unit of account
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Different definitions of money M 1 = Currency + Coin + Checking Accounts M 2 = M 1 + “near monies” M 3 = M 2 + larger “near monies” Savings deposits, money market deposit accounts, overnight repurchase agreements, Eurodollars, money market mutual funds, small time deposits Institutional Money Market Mutual Funds, Large time deposits, repurchase agreements & Eurodollars > 1 day
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Reserve Requirements Banks must meet reserve requirements by either Depositing adequate reserves at FRB, AND/OR Maintaining adequate cash in vault Problem: required and excess reserves earn no interest Banks are motivated to minimize excess reserves If excess reserves are too big, banks will expand loans and investments to earn extra income
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Reserve Requirements Excess Reserves appear as Federal Reserve Buys securities on open market Lends at discount window Lowers reserve requirements As depository institutions lend or invest excess reserves, M1 increases Example: Fed buys $100 in securities through open market operations, ER increases by $100 Bank lends ER to earn interest Lent $ are spent in economy
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This note was uploaded on 03/24/2011 for the course FINA 409 taught by Professor John during the Spring '11 term at Ohio State.

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Chapter03(1) - Chapter - 3 The Fed and Interest Rates The...

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