4.6 Part 2: The Reserve Market Amplfied And Limited Reserves Flashcards
How money is a bank required to hold in reserves.
Nothing
What does a bank look like with limited reserves
A bank that holds very little reserves with the central bank instead loan the money to customers or other banks
Meaning very little excess reserves , meaning a change in money supply had a very noticeable effect on interest rates
What do banks look like with amplified reserves?
Banks hold a lot of reserves in the central bank. Stricter regulations & Feds started to pay interest on reserve with meaning banks earn money
Interest On Reserves (IOR)
The interest rate that the Federal Reserves Pays commercial banks to hold reserves
What is the relationship between the Federal Funds Rate and quantity of reserves demand
Inverse
If the Fed Funds Rate is high, what do banks with their money?
They won’t deposit money to Feds instead they will loan out their money to other banks and earn money from lending money to each other
If Fed Funds Rate is low and banks can’t earn a lot of money through lending money to each other, what do banks do?
Deposit money to the Feds
What puts a cap on the Federal Funds Rate?
The discount rate because banks won’t borrow from each other at a higher rate
Why is supply vertical on a reserve market graph?
It’s set by the central bank
If the supply is behind the equilibrium, what does that tell you about the banking system ?
The banking system has limited reserves
How does the IOR acts as a floor for the reserve graph ?
Since the Feds are willing to pay a certain amount of interest that is above the amount other commercial banks are willing to pay then the bank will send the money to the Feds. B/c this no interest can’t be lower than the one the Feds offer making the Feds interest rate the floor
If the supply of reserve is out where there is ample reserve what happens to the effects of the monetary policy ?
Monetary policy doesn’t really have any effect any more b/c if banks puts trillion of dollars in the Fed then a billion dollar change in money supply isn’t going to have an effect on interest rates
What tools do the Feds use in an ample reserve banking system to effect the Economy
They can change the IOR
How can the Feds use the IOR to lower interest rates
Decrease IOR
How can the Feds use IOR to slow down economy
Increase IOR
