Eco 2315 Ch 11

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Potential Expansion Checkable Deposits =

(1/rr)(excess reserves) OR (mm)(excess reserves)

Actual Money Multiplier =

(change in M / change in MB)

Theoretical Money Multiplier =

1 / rr

If the reserve ratio is 10 percent, the money multiplier is

10

If the reserve ratio is 8 percent, then the money multiplier is

12.5

If the Fed increases the monetary base by $100,000 and the quantity of money increases by $250,000, the actual money multiplier is

2.5

Currency Drain Ratio =

C / D

M =

D + C

Desired Reserve Ratio =

R (reserves) / D (checkable deposits)

MB =

R + C

Desired Reserve Ratio =

R / D

Store of value

a means of holding purchasing power over time. Allows for the transfer of purchasing power from the present to the future.

Unit of account

a measure used to set prices and make economic calculations. It is a yardstick used to post prices and record debt.

The fed influences reserves by

adjusting the discount rate

Medium of exchange

any asset that individuals acquire for the purpose of trading rather than for their own consumption.

The leverage ratio is calculated as

assets divided by bank capital

Selling government bonds ___________ the money supply

decreases

On a bank's T-account, which are part of the banks liabilities?

deposits made by its customers but not reserves

Reserves are

deposits that banks have received but have not yet loaned out.

Banks with insufficient reserves can borrow from banks with excess reserves. The interest rate on these loans is the

federal funds rate.

In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have

increased both the money multiplier and the money supply.

Purchasing government bonds ___________ the money supply

increases

When a bank loans out money, the money supply ____________

increases.

The discount rate is the

interest rate on loans the Fed makes to banks, to influence the amount of reserves banks borrow

Reserves increase if the Federal Reserve

lowers the discount rate or auctions more credit.

The money supply increases when the Fed

lowers the discount rate. The increase will be larger the smaller the reserve ratio is.

On a bank's T-account, which are part of the bank's assets?

reserves but not deposits made by its customers

Required Reserves =

rr (reserve ratio) x D (checkable deposits)

The monetary base is the

sum of currency in circulation and bank reserves.

The money supply =

sum of currency in circulation and checkable bank deposits OR money multiplier x bank reserves

Term Auction Facility

the Fed chooses the quantity of reserves it will loan, then banks bid against each other for these loans.

If a bank has a reserve ratio of 8 percent, then

the bank keeps 8 percent of its deposits as reserves and loans out the rest.

The interest rate the Fed charges on loans it makes to banks is called

the discount rate.

Open-Market Operations

the purchase and sale of U.S. government bonds by the Fed

"Desired Reserve Ratio" effect is

when banks hold more reserves than required, they make fewer loans, and money supply falls.

"Currency Drain" effect is

when households hold more of their money as currency, banks have fewer reserves, make fewer loans, and money supply falls.


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