i The process stops when the 1000 initial increase in reserves RR and ER 0 C

I the process stops when the 1000 initial increase in

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i.The process stops when the $1,000 (initial increase in reserves) = RR and ER = 0C.The Simple Deposit Multiplier: 1.Total∆Checking Account Deposits = Reserves x 1/ߨa.Reserves = initial increase in revenues b.Where 1/ߨis the simple deposit multiplier c.ߨis the required reserve ratio (rr) (10% or .10) 2.Example: a.$1,000 was initially deposited in BOA $1,000 x (1/0.1) = $10,000 b.Conclude: with rr = 0.10 the increase in M1is 10 times the initial increase in reserves ($1,000) 1.Note: Real world deposit multiplier = 1.6 AssetsLiabilitiesReserves =+$900 Deposits= +$900 Loans =+$810 New Deposits= +$810
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2017 NITTANY NOTES ALL RIGHTS RESERVED ANY ATTEMPT TO REPRODUCE THESE NOTES IS PUNISHABLE BY LAWNittany NotesCheck outnittanynotes.com for Online notes!| 814-238-0623 Like us atFacebook.com/NittanyNotes ECON 104.1Exam Pack #3 24 OF 41 LAPOINTE ANNOUNCEMENTS:None ERRATA:None NOTES BEGIN: I.CHAPTER 14: MONEY AND THE FEDERAL RESERVEA.The Federal Reserve and Monetary Policy1.Is the Central Bank of the U.S. 2.Was created by Congress in 1913 a.Totally independent from the Congress and the President 1.Does not have to go to Congress for funding 3.One of the Fed’s major responsibilities: monetary policy a.The FOMC manages the nations money supply to conduct monetary policy 4.The FOMC has only 12 members (a lot smaller the U.S. Congress) B.The Goals of Monetary Policy:1.Price Stability (low inflation) 2.High employment (U = U bar) 3.Stability of financial markets and institutions (to promote the efficient flow of funds from savers to borrowers) 4.Economics growth C.How does the Fed change the money supply?1.The FOMC engineers Open Market Operations (OMO): The buying and selling U.S. Treasury securities (bonds) to control the money supply a.Case 1: Recession 1.The Fed increases the money supply with an Open Market purchase of Treasury securities from the public b.Case 2: Inflationary Boom 1.The Fed decreases the money supply with an Open Market sale of Treasury securities to the public (in the Bond Market)
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2017 NITTANY NOTES ALL RIGHTS RESERVED ANY ATTEMPT TO REPRODUCE THESE NOTES IS PUNISHABLE BY LAWNittany NotesCheck outnittanynotes.com for Online notes!| 814-238-0623 Like us atFacebook.com/NittanyNotes ECON 104.1Exam Pack #3 25 OF 41 LAPOINTE Nom. Int. Rate 5% 3% 1% MS1 D.How does the Fed change the money supply? 1.The Money Market a.Supple of M1(M5): is vertical, it is controlled by the Federal Reserve Demand for M1(Md): represents the transactions demand for money (assume M1earns zero or very low interest---so when interest rates rise, Mdfalls) E.Shifts in Money Supply (MS) and Money Demand (Md)1.Shifts in the Msa.OMP shifts the Msto the right b.OMS shifts the MS to the left 2.Shifts in the Mda.Md= f(Y1, P) b.Y > 0 increases the demand for money for transactions c.P > 0 increases M1required to pay for transactions 840 850 860 Q of M1 ($Billions)A
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2017 NITTANY NOTES ALL RIGHTS RESERVED ANY ATTEMPT TO REPRODUCE THESE NOTES IS PUNISHABLE BY LAWNittany NotesCheck outnittanynotes.com for Online notes!| 814-238-0623 Like us atFacebook.com/NittanyNotes ECON 104.1Exam Pack #3 26 OF 41
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