1 econ designed by amy mcguire, b-books, ltd. mceachern 2010-2011 15 chapter banking and the money...
TRANSCRIPT
1
ECON
Designed byAmy McGuire, B-books, Ltd.
McEachern 2010-2011
15
CHAPTER Banking and the Money Supply
Macro
3
Money Aggregates
LO1
Credit cards Loan from the card issuer Repay later Dispute a charge Not part of money supply
Debit cards From checking account Part of M1
4
How Banks Work
Banks earn profit Attract deposits from savers Lend to borrowers
Banks are financial intermediaries Reduce transaction costs Cope with asymmetric
information Reduce risk through
diversification
LO2
5
Reserve Accounts
Required reserve Dollar amount
Must be held in reserve Required by Fed
Required reserve ratio Percentage of checkable deposits (10%)
Must be held in reserve Reserves (Earn no interest)
Cash in bank’s vault Deposits at the Fed
Excess reserves
LO2
6
Liquidity vs. Profitability
Liquidity Ease to convert assets into cash Safety
Profitability Federal funds markets
Day-to-day lending and borrowing Among banks Excess reserves on account at the
Fed Interest: federal funds rate
LO2
7
How Banks Create Money
LO3
Creating money through excess reserves– Round one
• Fed buys $1,000 U.S. government bond– Creates reserves
• Money supply: +$1,000• Required reserves: +$100• Excess reserves: +$900
8
How Banks Create Money
LO3
Creating money through excess reserves– Round two
• $900 loan• Money supply: +$900• Required reserves: +$90• Excess reserves: +$810
9
How Banks Create Money
LO3
Creating money through excess reserves– Round three
• $810 loan• Money supply: +$810• Required reserves: +$81• Excess reserves: +$729
10
Reserve Requirements & Money Expansion
LO3
Assumptions– No bank holds excess
reserves– Borrowed funds don’t sit
idle– People don’t want to hold
more cash
11
Reserve Requirements & Money Expansion
LO3
Required reserve ratio = r Money multiplier Simple money multiplier = 1/r Change in the money supply = Change in fresh
reserves × 1/r
12
Multiple Contraction ofMoney Supply
LO3
The Fed sells a $1,000 bond– Money supply: -$1,000– Required reserves: -$900– Recall loans– Money supply: -$900– Required reserves: -$810– Maximum effect
• Decrease money supply = Original decrease in reserve requirements × 1/r
13
The Fed’s Tools of Monetary Control
LO4
Open-market operations– Buy/sell U.S. government bonds
The discount rate– Interest rate, the Fed– For loans made to banks
The required reserve ratio– Minimum fraction of reserves
14
Open-Market Operations
LO4
Increase money supply–The Fed buys U.S. bonds
• Open-market purchase Reduce money supply
–The Fed sells U.S. bonds• Open-market sale
15
Open-Market Operations
LO4
Tool of choice for the Fed Influences bank reserves Influences federal funds rate
– Interest rate– Borrowing among banks– Of excess reserves at the
Fed
16
The Discount Rate
LO4
Discount rate– Interest rate charged by the Fed– Loans to banks
Bank borrow ‘Discount window’– Satisfy reserve requirements
The Fed– Lender of last resort
17
Reserve Requirements
LO4
Required reserve ratio Money creation for each dollar of
fresh reserves Disruptive
–Banking system