Beruflich Dokumente
Kultur Dokumente
McGraw-Hill/Irwin
Learning Objectives
The main topics of this chapter are:
1. 2. 3. 4. 5. 6. 7. 8. 9. The organization of the BSP. Reserve requirements. The deposit expansion multiplier. Creation and destruction of money. The tools of monetary policy. The Feds effectiveness in fighting inflation and recession. The Banking Act of 1980 and 1999. Monetary policy lags. The housing bubble and the subprime mortgage crisis.
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Answer: First $9.3 million of deposits: 0% reserve requirement Next 34.6 million: $34,600,000 X .03 = Next 56.1 million: $51,700,000 X .10 = Required Reserves =
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Definitions
Required Reserves (RR) is the minimum amount of vault cash and deposits at the Federal Reserve District Bank that must be held (kept on the books). Actual Reserves (RD) is what the bank is holdingor its Reserve Deposits. Excess Reserves (ER) occur if bank holds more than the required minimum on reserve. ER = RD RR Remember: Banks do not make profits on funds held as reserves.
ER can be loaned out. So banks want to hold ER as close to zero as possible.
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Secondary reserves: Treasury bills, notes, certificates, and bonds that will mature in less than a year.
These are easily converted into cash for reserves by selling them to another bank.
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The reserve requirement affects the size of the deposit expansion multiplier.
Lets look at an example of the deposit expansion process
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The company with the $90,000 loan writes a check to spend it. This is deposited in another bank.
This bank must keep $9,000 in reserves to cover the new depositby borrowing cash or selling secondary reserves. But the second bank can lend out $81,000 ($90,000 $9,000).
This $81,000 becomes a deposit in another bank, and the process continues.
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If the process continued, there would be $100,000 in deposits credited to various bank accounts, backed by $100,000 in reserves.
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= 10
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DEM =
1 .25
= 4
When RR increases, the DEM decreases. When RR decreases, the DEM increases.
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In 2004 Congress passed the Check Clearing Act of the 21st Century (Check 21).
Law intended to facilitate electronic check processing. How? Lets look at the check clearing process.
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Electronic Transfers
Increasingly, money is changing hands electronically.
Example: When you use your debit card the amount is deducted within seconds after the card is swiped. Example: Paypal accounts facilitate paperless transfers.
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Open market operations have been the most commonly used monetary policy tool.
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Hint: When the Fed buys or sells bonds, they affect the market price of the bonds.
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Increasing the money supply leads to a decrease in interest rates. During a recession, lower interest rates may encourage businesses to increase Investment and households to increase Consumption. If C and I increase, the fiscal policy multiplier will lead to a greater increase in real GDP.
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Open Market Operations Fed buys $1000 bond from a commercial bank
New Reserves
$1000
$1000 Excess Reserves
$5000 Bank System Lending Total Increase in the Money Supply, ($5,000)
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Open Market Operations Fed buys $1,000 bond from the public
Check is Deposited New Reserves
$1000
$800 Excess Reserves $200 Required Reserves
Lowering interest rates is expansionary response to recession. Raising interest rates is contractionary response to inflation.
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To combat recession, Fed lowers required reserve ratio to create more excess reserves.
Example: Lowered from 12% to 10% in 1992.
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Like pulling on a string, when the Fed fights inflation, it get resultsprovided of course, it pulls hard enough.
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Fighting a recession is another matter. Like pushing on a string, no matter how hard the Fed works, it might not get anywhere. If Aggregate Demand is low, businesses may not invest, no matter how low interest rates are. Keynes Liquidity Trap: if interest rates are too low, people will simply hold on to their money.
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The first two lags may be shorter because of consolidated power of Feds Board of Governors. But the impact lag may be longer.
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