The Reserve Requirement- Only small percent of your bank deposits is in the safe. The rest of your money has been loaned out. This is called "Fractional Reserve Banking."
+The FED sets the amount that banks must hold
+The reserve requirement (reserve ratio) is the percent of deposits that banks must hold in reserve and NOT loan out.
+ When the FED increases the money supply (MS) it increases the amount of money held in the bank deposits.
#1- If there is a recession what should the FED do to the reserve requirement?
- decrease reserve ratio
+banks hold less money and have more excess reserves (ER)
+banks create more money by loaning out excess
(interest rate decrease= AD increases)
#2- If there is an inflation, what should the FED do to the reserve requirement?
-increase the reserve ration
+banks hold more money and have less excess reserves
+banks create less money
+money supply decreases
(interest rates increases= AD decrease)
The discount rate- the interest rate that the FED charges commercial banks
EX.
- if Bank of America needs $10 million, they borrow it from the US Treasury, but they must pay it back with interest
To increase the money supply, the FED should DECREASE the discount rate (easy money policy)
To decrease the money supply, the FED should INCREASE the discount rate (tight money policy)
Open Market Operations (OMO)- the FED buys/sells government bonds (securities)
- this is the most important and widely used Monterrey policy
To increase the money supply, the FED should BUY government securities.
To decrease the money supply , the FED should SELL government securities.
Monetary policy Expansionary Contraction
(easy money) (tight money)
RECESSION INFLATION
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OMO buy bonds sells bonds
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Discount Rate decrease increase
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Reserve Requirement decrease increase
loans- increase loans- decrease
AD- increases AD- decrease
GDP- increase GDP- decrease
MS- increase MS- decrease
i- decrease i- increase
Federal Funds Rate- where FDIC member banks loan each other overnight loans
Prime Rate- interest rate that banks give to their most credit worthy customers
(better interest rate-------------> better deals)
Your notes are very well organized as well as the way the information flows, but you should add when it talks about monetary policy. which is when a customer deposits cash or withdra from their demand deposit account , it has no effect on money supply. Dont forget to post the rest of the informtion
ReplyDeleteExcellent post.! I would like to add that the money loaned out after the reserve requirement has been deducted comes from the banks excess reserves.
ReplyDelete