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(BBA)CH14 Money Supply Process

(BBA)CH14 Money Supply Process - Chapter Fourteen The Money...

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    Chapter Fourteen    The Money Supply Process
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    Three Players in Money Supply Process (p.345) Three Players Banks Central Bank Depositors Money Supply
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    FED' s Balance Sheet (p.346) Federal Reserve System Assets Liabilities Government Securities Currency in Circulation Discount Loans Reserves monetary  liabilities
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    Liabilities of FED' s Balance Sheet (p.346) Monetary Base: 1. Fed's monetary liabilities (Currency in circulation and reserves) 2. Treasury's Currency in Circulation (Coins) that is less than 10% of the monetary base. Monetary Base Currency in Circulation Reserves
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    Liabilities of FED' s Balance Sheet (p.346) Currency held by depository institutions is a liability of the Fed, but is counted as parts of reserves. Currency in circulation is the amount of currency in hand of the public. Held by the public Held by banks Currency in Circulation Currency in circulation reserves
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    Assets of FED' s Balance Sheet (p.347) All banks have an account at the Fed in which they hold deposits. Reserves consists of deposits at the Fed plus currency that is held by banks (called vault cash stored in bank vaults). Total reserves are divided into two categories: 1. Required reserves : reserves that the Fed required banks to hold. 2. Excess reserves : any additional reserves the banks choose to hold.
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    Control of the Monetary Base (p.347)   1. Currency in Circulation (held by public) 2. Total Reserves in Banking System (including currency in circulation held by banks) Equation: MB = C + R
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    Control of Monetary Base (p.348- 354) The ways Fed exercises control over monetary base: 1. Open Market Operation 2. Shift from Deposits to Currency 3. Discount Loans 4. Other Factors
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    Federal Reserve Open Market Operations (p.348) A. Open Market Purchase from a Bank                        Banking System Assets Liabilities Securities (-) $100 Reserves (+) $100 Federal Reserve System Assets Liabilities Securities (+) $100 Reserves (+) $100
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    Federal Reserve Open Market Operations (p.348) B. Open Market Purchase from Non-Bank Public                           Non-bank Public Assets Liabilities Securities (-) $100 Checkable deposit (+) $100 Banking System Assets Liabilities Reserves (+) $100 Checkable deposit (+) $100 Federal Reserve System Assets Liabilities Securities (+) $100 Reserves (+) $100
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    Federal Reserve Open Market Operations (p.350) The effect of an open market operation purchase on reserves depends on whether the sellers of the bonds keeps the proceeds from the sale in currency or in deposits. If the proceeds are kept in currency, the open market purchase has no effect on reserves. If the proceeds are kept as deposits, reserves increased by the amount of the open market operation.
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    Federal Reserve Open Market Operations (p.350) A. Individuals or Firms Sell Bonds to Fed                        Non-Bank Public Assets Liabilities Securities (-) $100 Currency (+) $100 Federal Reserve System Assets Liabilities Securities (+) $100 Currency in Circulation (+) $100
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