Ch 17 Summary Notes: Fed Balance Sheet: Monetary Base: The monetary Base is made up of the two liabilities of the FED: A & C. The monetary base represents the potential for increases in the Money Supply (Stock) depending upon the behavior of FED policy, the non-bank public’s desire to hold currency, and commercial bank’s management policy for holding excess reserves because they are “risk averse” to lending given the current state of the economy. Open Market Operations—OMO The FED acts to change the base by engaging primarily in Security purchases and sales. For example: See figure 17.2 OMO Purchase: A purchase of $1 in securities from a bank increases reserves by +1 and decreases securities by -1. With more reserves, a com bank has the capacity to increase loans if it wants. M will increase by the magnitude of the multiplier. OMO Sale: A sale of $1 in securities to a bank decreases reserves by -1 and increases securities by +1. With fewer reserves, a com bank has less capacity to make loans. If fully “loaned out” it must
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