Monetary Policy Part 1
Excess reserve requirement equals what?
(Excess Reserves)= (legal reserves)- (required reserves) ER=LR-RR
If the Fed lowers the reserve requirements what will happen?
A portion of what was previously required reserves becomes excess reserves, which can be used to make loans and expand money supply. A lower reserve requirement also increases the deposit expansion multiplier.
The government also serves as an intermediary, how?
By using transfer payments, which take money from taxpayers and transfer this income to others.
One way the Fed can alter excess reserves is by?
Changing Reserve requirements
Monetary Policy
Is a policy directed toward control of money and credit.
Fiscal Policy is determined by?
Laws that are passed by Congress and signed by the president.
Governments responsibility is to?
Minimize the damage from business cylces
Required reserves equal what?
Required reserves= reserve requirements x deposits RR= rD
Tools of Monetary Policy
Reserve Requirements, Discount Rate, and Open Market Operations.
Federal Reserve
The central bank of the United States, it serves as a bank for the U.S. government and regulates the money supply.
Transaction deposits
Are checking accounts and other deposits that can be used to pay third parties.
When spending is greater than revenue, the excess spending must be covered by?
Borrowing and this borrowing can have effects on investment and consumption as well as on economic relationships with other countries
As bank excess reserves change, the lending and money-creating potential of the banking system does what?
Changes
Fiscal Policy
Directed toward governement spending and taxation.
Who is the major player in this policy arena?
Federal Reserve or "The Fed"
What is the federal funds market?
If a bank needs more reserves in order to make new loans, it typically borrows from other banks in the federal funds market. Because the funds are being loaned from one commercial bank's excess reserves on deposit with the federal reserve to another commercial banks deposit account at the Fed.
The Focus of the government's Macroeconimic Policy is?
Monetary and Fiscal Policy
By raising reserve requirements what happens?
The Fed reduces the money-creating potential of the banking system and tends to reduce the money supply. A higher reserve requirement also lowers the deposit expansion multiplier.
What happens when legal reserves exceed required reserves?
The bank has excess reserves available for lending.
What happens when legal reserves equal required reserves?
The bank has no excess reserves and can make no new loans.
Discount Rate
The interest rate the Fed charges commercial banks when they borrow from it.
What are two ways legal required reserves can be held?
Vault cash at the bank or a deposit in the Fed.
When does a budget surplus exist?
When federal government spending is less than tax revenue.
When does budget deficit occur?
When federal government spending was much larger than revenue.
When does a balanced bugdet occur?
When federal spending is approximately equal to federal revenue.
Reserve Requirement
When the Fed requires banks to hold a fraction of their transaction deposits on reserve or the dollar amount of reserves that a bank must hold to meet a requirement.
