Lecture Notes 6

Lecture Notes 6 - 18/04/11 Monetary Policy and the Fed (the...

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18/04/11 Monetary Policy and the Fed (the U.S. central bank) Role of the Central Bank 1. Issues Federal Reserve Notes – dollar bills, our currency 2. ‘Controls’ the money supply – conducts monetary policy 3. Regulations – affected by the recent financial crisis. a. Margin Requirements: lending rules for borrowing stocks, impacts the stock market 4. Government’s bank Assets and Liabilities of the Federal Reserve o Member Bank Deposits – Liability – the Fed has to be able to provide any money that a member bank demands o Federal Reserve Notes – Liability – the Fed has to print them o Government Securities – Asset – U.S. Treasury Bills – when the Federal government has a debt, it issues the U.S. treasury bills to the Fed How does the Fed conduct monetary policy given these liabilities and assets? Controlling the Money Supply: Tools of Fed Policy: o Reserve requirements, the ability to change reserve requirements, the highly liquid reserves of banks By creating excess reserves, a cut in RR, leads to an increase in excess reserves of commercial banks, money multiplier effect will tend to increase the money supply If the RR increase, commercial banks must cut bank on lending RR are so powerful and thus are changed over long period of time, but are almost never used as a short term solution o Open Market Operations: the buying and selling of government securities, done through the Federal Reserve Bank Could the U.S. market default? What happens when the Fed buys a U.S. Treasury Bill from a commercial bank? What are the transactions on the balance sheets? Transaction 1 – the Fed buys a dollars worth of GS from a commercial bank The commercial bank reserves increase by 1 The commercial bank loses 1 dollar worth of government securities in their assets column The Fed’s government securities increase by 1 dollar The Fed gave up a dollar worth of check writing privileges If the commercial bank was fully loaned at this point, the reserves + 1 is excess reserves –
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This note was uploaded on 09/08/2011 for the course ECON 101 taught by Professor Gulati during the Spring '11 term at Columbia.

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Lecture Notes 6 - 18/04/11 Monetary Policy and the Fed (the...

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