Balance Sheet of the Banking IndustryAssetsLiabilities& Net worthLoans $1000Bdeposits: $1000BReserves $100BNet worth $100BIt was estimated that nearly half of all banks had a neg. net worth during the Great RecessionSay the Fed sets the required reserve ratio (RR) is 10%. Is it met? Q: The Fed buys $10 B of bonds from the public in an “open market operation.” How many things change above?
Q: When the Fed buys bonds (i.e. an “open market purchase”), all else equal, bond prices ____ and interest rates _____. Q: The faed can easily change the amount of money in the economy. How?? Q: Why are banks so important and why were so many bailed out in2008? 34
Part D: What is the Fed? The Fed (Federal Reserve) is one of many central banks Functions • conduct monetary policy ◦ interest rates (control inflation and max employment) • regulate banks and financial system • operate as a bank for banks ◦ banks have deposits/reserves there ◦ banks can barrow from the Fed and the “discount rate” (vastly less important than the federal funds rate • Serve as the " lender of last resort” to prevent financial collapse during a crisis ◦ lend at the discount rate ◦
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