Unformatted text preview: 4 17 / 41 Bank Management Deposit Outﬂows - Borrowing The bank can borrow from the Federal Reserve:
Securities $10M Liabilities
Bank Cap. $10M
Fed Borrowings $3.5M They now have enough reserves to cover their shortfall. Ryan W. Herzog (GU) Money March 17, 2014 18 / 41 Bank Management Loan Write down What happens when there is a large decline loan values?
Bank Cap. -$10M
A loan write down (maybe home values fall) causes the value of
assets to fall without changing liabilities.
In this case the bank will become insolvent. Ryan W. Herzog (GU) Money March 17, 2014 19 / 41 The Fed The Fed Central bank of the United States (System of Banks)
Headed by the Board of Governors (7 people elected to 14 year
non-renewable terms, appointed by the POTUS and conﬁrmed by the
Chairman of the BoG is Ben Bernanke (4 year, renewable term)
12 Regional Federal Reserve Banks (oversee commercial banks)
Federal Open Market Committee (7 governors and 5 regional bank
presidents) conducts monetary policy. Ryan W. Herzog (GU) Money March 17, 2014 20 / 41 Central Banking The Money Market
The short-term interest rate is controlled by the Federal Reserve
(called federal funds rate). The long-term interest rate (aﬀect
household borrowing) is determined in the loanable funds market. But
remember the short-term interest rate determines the long-term
The federal funds rate is determined in the market for reserves (i.e.
through open market operations).
The money market determines the interest rate for money by equating
money supply and money demand. You can think of this interest rate
as the interest rate earned on your savings account.
Money supply is controlled by the Federal Reserve and money demand
is determined by households. Ryan W. Herzog (GU) Money March 17, 2014 21 / 41 Central Banking The Money Market (Figure 11.3) Ryan W. Herzog (GU) Money March 17, 2014 22 / 41 Central Banking Money Supply The money supply is primarily controlled by our central bank (The
The Fed uses government bonds to buy and sell reserves from banks
(called open market operations).
If the Fed wants to increase lending they will increase reserves by
buying the banks securities (called an open market purchase). This
will cause an increase in bank lending.
If the Fed wants to decrease lending they will decrease reserves by
selling the banks securities (called an open market sale). Ryan W. Herzog (GU) Money March 17, 2014 23 / 41 Central Banking An Open Market Purchase Suppose we have the following balance sheet wi...
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