Final Flashcards
Reserve Requirement
Fed requires banks to hold a reserve for a percentage of the checkable deposits
Two forms of reserves
Vault cash, Deposits at Fed
Formula for Reserve
CD=1/rr x E
Money Multiplier
1/rr
Motives for holding money
Transactions demand (Positively related to nominal income), Precautionary demand (+), Asset demand (-)
Asset demand
Demand for money as a store of value
If Fed increases money supply dramatically..
Interest rates would fall
If Fed decrease money supply dramatically…
Interest rates would rise
Classical View Key Assumptions
Velocity of money is fixed. Q is also fixed.
What causes inflation
To much money, chasing to few goods
Why does it make since for the Federal Reserve System to require commercial banks to hold reserves?
It makes since due to the fact that the bank must have enough money in case their clients wanted to come in and close their accounts
How to find how much money can be created in the entire banking system
1/rr times the excess reserves
Who sets discount rate
Board of Governors
Increasing the discount rate would cause
less borrowing
Decreasing the discount rate would cause
More borrowing
Currency Drain
Decreases excess reserves available. Decrease money multiplier
Discount Rate
Fed charges interest of reserves sent to other banks
Federal Funds Rate
Interest rate that commercial banks charge each other on excess reserves they lend back and forth
Active Policy Making
Is when policy actions are taken in response to some change in the overall economy (discretionary). Can be destabilizing
Passive Policy Making
Policy making based on some rule (Non-discretionary)
Phillips Curve
Maybe a short run trade off.
What does long run phillips curve look like?
Straight vertical line
