Lectures 22-24 Flashcards
What is a reserve requirement?
The minimum fraction deposits that banks must hold as reserves?
What happens when the reserve requirements increase?
Banks can make fewer loans
The money supply SHRINKS
What kind of monetary policy is raising the reserve requirement?
Contractionary
What happens when the reserve requirements decrease?
Banks can make more loans
Money supply GROWS
What kind of monetary policy is lowering the reserve requirement?
Expansionary
How do you calculate the money multiplier?
change money supply/change monetary base
Is the change in money supply or monetary base greater?
The change in money supply is greater than the change in the monetary base
How do you calculate the money multiplier assuming NO excess reserves?
1/reserve requirement
How do you calculate the money multiplier assuming YES excess reserves?
1/fraction banks hold as reserves
What line does open market purchases shift? And what way?
The supply line shifts to the right
In the market for reserves (interbank lending), an open market purchase shifts the ___ line to the ____ and ____ the federal funds interest rate and _____ the quantity of reserves.
An open market purchase shifts the supply line to the right and decreases the federal funds interest rate and increases the quantity of reserves.
In the market for reserves, what does the supply line represent?
The monetary base
In the market for money, an open market purchase does what?
Shifts the supply line to the right which decreases the short term interest rate and increases the quantity of moneyWh
What is the opportunity cost of holding money?
The short term interest rate of money
In the market for loanable funds, what happens after an open market purchase?
The supply line shifts to the right, which decreases the REAL INTEREST RATE and increases the quantity of loanable funds.
In the real economy, what happens after an open market purchase?
The aggregate demand line shifts to the right. The price level increases and the real GDP increases (meets potential GDP)
What happens when a country’s currency appreciates?
The exchange rate increases
In the market for USD, what happens as the exchange rate decreases?
US exports become more competitive. Foreign households want more US goods and demand more USD
In the market for USD, what happens as the exchange rate decreases (pt 2)?
The demand for USD increases
In the market for USD, what happens as the exchange rate increases?
American consumers are more likely to purchase foreign imports and supply their USD.
What do currency traders do when the USD exchange rate is lower?
They purchase more USD
What do currency traders to when the USD exchange rate is higher?
The sell more USD
What are the demand shifters (USD)?
Change in the demand for US exports
rGDP growth in close trading partner countries
Changes to the real interest rate
Expected future exchange rate
What relationship do the demand shifts have of USD?
POSITIVE
What are the exchange rate policies?
Market rate (floating exchange rate)
Managed Float
Crawling peg
Peg (fixed exchange rate)
What is the least interventionist exchange rate policy?
Floating/market
What is a managed float?
If a currency appreciates/depreciates past a certain amount, the central bank steps in
What kind of countries usually use a peg exchange rate policy?
Countries reliant on trade or tourism
How does a central bank appreciate its currency?
by buying their own currency using reserves of other countries
What does purchasing its own currency do (in relations to supply and demand)
Increases demand for their currency
When would a central bank want to appreciate its currency?
When the market rate falls below the target rate
When would a central bank want to depreciate its currency?
When the market rate rises above the target rate
How does a central bank depreciate its own currency?
By selling its own currency.
What does the selling of a currency do (by the currency owner)
Increases the supply of their currency
What does the balance of payments always have to equal?
0
What are the 3 accounts in the balance of payments?
current account
capital/financial account
settlements account
What does a positive number in the current/capital account mean?
Money is coming into the US
How do you calculate the current/capital account?
Exports-imports
Net interest income
net transfers
net investments
What does net interest income show up as is it is coming INTO THE US?
Positive, negative if coming out of the US
What do net transfers always show up as?
negative
What does money from factories in foreign countries show up as in the capital account?
negative
In the official settlements account, money coming into the country from other countries shows up as ____ and losing money shows up as _____
Negative, positive
Remittances are part of what account?
The CURRENT account
Purchasing a good from another country shows up as ___ in the ___ account?
A negative entry into the current account
