e deposits with the RR playing a key role money 1RR x bank reserves Fed

E deposits with the rr playing a key role money 1rr x

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Ten-fold increase in money (i.e. deposits) with the RR playing a key role money - (1/RR) x bank reserves Fed controls RR (required reserve ratio) by regulation bank reserves (via open market operations) the fed controls the amount of money in the economy 33
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Note: only money here is deposits; currency ignored (more complicated equation) Q: When the Fed buys bonds (i.e. an “open market purchase”), all else equal, bond prices ____ and interest rates _____. A. a big institution buying a lot of things, increasing demand, price rises. interest rates falls when the price of bonds goes up this is how the fed controls interest rates when price rises, interest rates fall The fed can reduce money and raise interest rates with an open market sale of bonds Q: The faed can easily change the amount of money in the economy. How?? A: Buys and sells bonds and new bank loans, leads to money creation money creation money= (1/RR) x bank reserves If a company or individual’s net worth is less than 0, they are bankrupt Q: Why are banks so important and why were so many bailed out in 2008? A: Bank loans are critical for a functioning economy, banks are part of money creation, and bank liabilities (deposits) are extremely important for investment 34
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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 ex: 9/11 press release: “The federal reserve system is open and operating. The discount window is available to meet liquidity needs.” Central Banks are typically fairly independent of their governments Congress gives them their dual mandate: stable prices and low unemployment Part E: Fiscal Policy 35
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Q: Which is larger? The federal federal deficit or the federal debt? A: Fiscal deficit describes a government with expenditures that are greater than its revenues during a fiscal year. The federal debt is the total amount of money that the U.S. federal government owes to its creditors. Deficit = $506 billion (2.9% of GDP) = (G + Trans. Payments) - T = $3,512 billion - $3,006 billion Total federal Debt $17.2 trillion Debt owed to the public $12.8 trillion (74% of GDP) Deficit- amount borrowed per year Debt : total owed (accumulated deficits) 1. The federal government should balance its budget every year (i.e. spending taxes; no borrowing) 2. When a recession occurs fiscal policy should be used to fight the recession Statements 1 and 2 are in conflict Most economists argue for balancing the budget over the business cycle. This is “counter-cyclical fiscal policy” Two ways to do this: Automatic stabilizers - ex. unemployment insurance doesn’t take a new law or an act of congress.. already in the system 36
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acts pretty quickly Discretionary fiscal policy
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