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LectureNote13 - LECTURE THIRTEEN Tools of Monetary Policy...

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LECTURE THIRTEEN Tools of Monetary Policy ECONOMICS 209 Professor Kevin Huang Vanderbilt University
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15-1 Tools of Monetary Policy Open market operations Determine nonborrowed monetary base The discount rate Affect borrowed reserves Required reserve ratio Affect the money multiplier Federal funds rate—the interest rate on overnight loans of reserves from one bank to another Primary indicator of the stance of monetary policy
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15-2 Demand in the Overnight Market for Reserves What happens to the quantity of reserves demanded, holding everything else constant, as the federal funds rate changes? Two components: required reserves and excess reserves Excess reserves are insurance against deposit outflows The cost of holding the excess reserves is the interest rate that could have been earned, that is, the FFR As the federal funds rate decreases, the opportunity cost of holding excess reserves falls and the quantity of reserves demanded rises Downward sloping demand curve
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