DSST Money & Banking Part 1

G in its reserve account at the central bank in

Info icon This preview shows pages 14–15. Sign up to view the full content.

View Full Document Right Arrow Icon
that a bank has, e.g., in its reserve account at the central bank, in exchange for a bank selling or buying a financial  instrument. Newly created money is used by the central bank to buy in the open market a financial asset, such as  government bonds foreign currency , or  gold If the central bank sells these assets in the open market, the amount of  money that the purchasing bank holds decreases, effectively destroying money. The process does not literally require the immediate printing of new currency. A central bank account for a member bank  can simply be increased electronically. However this will increase the central bank's requirement to print currency when  the member bank demands banknotes, in exchange for a decrease in its electronic balance. Often, the percentage of the  total money supply consisting of physical banknotes is very small. In the United States only around 10% of the "M2"  money supply actually exists in the form of physical banknotes or coins. The rest exists as credits in computerized bank  accounts. See  Money supply . Possible targets of open market operations Under  inflation targeting , open market operations target a specific short term interest rate in the debt markets.  This target is changed periodically to achieve and maintain an inflation rate within a target range. However, other  variants of monetary policy also often target interest rates: both the  US Federal Reserve  and the  European   Central Bank  use variations on interest rate targets to guide open market operations.  Besides interest rate targeting there are other possible targets of open markets operations. A second possible  target is the growth of the  money supply , as was the case in the U.S. in the late 1970s through the early 1980s  under Fed Chairman  Paul Volcker Under a  currency board  open market operations would be used to achieve and maintain a  fixed exchange rate   with relation to some foreign currency.  Under a  gold standard , notes would be convertible to gold, so there would be no open market operations. However, open  market operations could be used to keep the value of a fiat currency constant relative to gold. A central bank can also use a mixture of policy settings that change depending on circumstances. A central bank  may peg its exchange rate (like a currency board) with different levels or forms of commitment. The looser the  exchange rate peg, the more latitude the central bank has to target other variables (such as interest rates). It may  instead target a basket of foreign currencies rather than a single currency. In some instances it is empowered to 
Image of page 14

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern