week nine - money supply Flashcards
who are the three players in the money supply process
- the central bank: federal reserve system
- banks: : depository institutions; financial intermediaries
- Depositors: individuals and institutions
What are the liabilities on the Federal Reserve System’s balance sheet?
The liabilities on the Federal Reserve System’s balance sheet include currency in circulation, which is held by the public, and reserves, which consist of bank deposits at the Fed and vault cash.
What are the assets on the Federal Reserve System’s balance sheet?
government securities, which affect the money supply and earn interest, and discount loans, which provide reserves to banks and earn the discount rate.
e.g What are the assets (uses of funds) on a bank’s balance sheet?
reserves and cash items, securities, deposits at other banks, loans, and bank capital.
What are the liabilities (sources of funds) on a bank’s balance sheet? e.g.
checkable deposits, Nontransaction deposits, other deposits (e.g., savings deposits), borrowings, and bank capital.
what is the equation for monetary base
MB = C + R
C = currency in circulation
R = total reserves in the banking system
what happens in an open market purchase
An open market purchase always increases the money base by the amout purchsed
what happens in an open market sale
reduces the monetary base by the amount of the sale but the reserves remain unchanged
what happens when deposits turn into currency
- Net effect on monetary liabilities is zero
- reserves are changed by random fluctuations
- monetary base is relatively stable
what happens when the federal reserves give financial institutions a loan
monetary liabilites of the Fed have increased by 100m and the monetary base also increases by that amount
what other factors affect the monetary base
- float : the lag between the FED clearing a check from the bank e.g. weather
- treasury deposits at the fed :
- interventions of the foreign exchange market:
Can the Fed determine the amount of borrowing by banks from it?
No
How can the monetary base be split into two components?
The monetary base (MB) can be split into two components: the non-borrowed monetary base (MBn) and the level of borrowed reserves (BR) from the Fed.
How is the money supply related to the non-borrowed monetary base and the level of borrowed reserves?
The money supply is positively related to both the non-borrowed monetary base (MBn) and the level of borrowed reserves (BR) from the Fed.
what factors determine the money supply
- change in the required reserves ratio
- the money supply is negatively related to the required reserve ratio
- changes in the excess reserves
the money supply is negatively related tot hr excess reserves - changes in currency holdings
- the currency supply is negatively related to currency holdings
