Topic 12 Flashcards
Bank Credit
increase of bank lending, either through making loans or buying bonds
What increase the NON-BORROWED monetary base?
a. Fed buys securities
b. U.S. Treasury spends some of its account
What increases the BORROWED monetary base?
Fed lends to banks at the discount rate
What decreases the NON-BORROWED monetary base?
a. Fed sells securities
b. Treasury deposits at Fed rises (eg. tax payments are deposited)
What decreases the BORROWED monetary base?
Banks reduce amount of borrowing from Fed
How does FED budget deficit affect the money supply?
Federal budget deficit increases monetary base
Capital Constraint
the restriction to keep certain proportion of risky assets as capital
Dynamic OMOs
intended to change monetary policy
(are conducted through outright purchases and sales of treasury securities)
TRIGGER: simply by the FOMC voting that the target needs to be raised/lowered
Defensive OMOs
intended to keep the monetary policy the same
TRIGGER: an anticipated shock to the economy by FOMC to keep Fed Funds Rate Constant
Repurchase Agreements
o Fed buys today, agreeing to sell back to seller on a given date
o temporarily increases monetary base
o Bnon increases when the Fed buys and then decreases back to its original level when the Fed sells the securities back
Reverse Repurchase Agreements
o Fed sells today and buys back later
o temporarily reduces monetary base
What might cause currency ratio to INCREASE?
- more currency circulating outside the U.S.
- increases in underground economy
- loss of confidence in safety of banks
- Low interest rate on checking accounts or high fees
What might cause currency ratio to DECREASE?
- increased use of ATMs, debit cards, and credit cards due perhaps to reduced fees
- higher interest on checkable deposits
What might cause excess reserve ratio to INCREASE?
a. Uncertainty of cash needs by banks
b. Lower opp cost between int. rates on gov’t debt/bank loans and interest FED pays to banks on excess reserves
