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Unformatted text preview: ECONOMICS 100B Professor Steven Wood 02/17/11 Lecture 10 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS: Exam 1 is next Tuesday, February 22, from 3:40- 5:00. There will be 10 multiple choice questions and 2 analytical questions. Exam questions will be similar to the questions in problem sets. You do not need to bring blue books. You should be familiar with these models: 1.) Production Function/Labor Market Models 2.) Closed Economy Savings and Investment Model 3.) Open Economy Savings and Investment Model 4.) Solow Growth Model LECTURE: iCLICKER QUESTIONS/ANSWERS: 1.) The money supply would shrink by the greatest amount if the public INCREASED their currency ratio and the banks INCREASED their excess reserve ratio. 2.) If the Fed wanted to reduce the money supply without using open market operations, it could try to get the public to INCREASE their currency ratio and RAISE banks reserve requirements. 3.) The Fed can reduce the money supply by reducing the monetary base. MONEY SUPPLY PROCESS: The money supply process is based on changes in the Feds balance sheet, which consists of assets and liabilities. The Feds assets include government securities, which are acquired through open market operations, and discount loans to depository institutions (banks). Discount loans consist of banks borrowings from the Fed. The rate at which banks borrow from the Fed is known as the discount rate. On the other hand, the Feds liabilities include currency in circulation, which is held by the non- bank public, and reserves, which consist of bank reserves deposited at the Fed and banks vault cash. Whenever banks borrow from the Fed, the Feds assets increase. Whenever banks make deposits at the Fed, the Feds liabilities increase, because it must pay back the banks whenever demanded. There are two types of reserves: 1.) Required reserves: the minimum amount of reserves banks must legally hold against their deposits. This is determined by the required reserve ratio, rr , which is set by the Fed. 2.) Excess reserves : extra reserves that banks decide to hold over their required reserves....
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