Eco 2315 Ch 11
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.