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LUC / OTHER / ECON 202 / What is the meaning of open market operation?

What is the meaning of open market operation?

What is the meaning of open market operation?

Description

School: Loyola University Chicago
Department: OTHER
Course: Intro to Macroeconomics
Term: Fall 2017
Tags:
Cost: 25
Name: ECON 202 week 8
Description: week 8 class notes
Uploaded: 10/24/2017
9 Pages 38 Views 1 Unlocks
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10/17/17We also discuss several other topics like How do you predict the products of a double displacement reaction?
We also discuss several other topics like What is the mauryan empire known for?

*Sept 2017 rate of inration = 2.2%If you want to learn more check out How to use the define of a derivative?
Don't forget about the age old question of Give the 4 types of chemical reactions.

The tools of monetary policy

  • Open market operations
  • The reserve ratio
  • The discount rate

We also discuss several other topics like What is the best definition of outlining?

Fed Reserve balance sheet

                                                                bank

A

L

A

L

   S

R

R

D

DL

S

DL

Don't forget about the age old question of Is greek art a big deal?

* Open market operations

  • Refers to the Feds purchase or sale of government securities from or to commercial banks or the public

Buying securities from a commercial bank for $1000

                Fed                                                bank

            A

    L

            A

L

   S + 1000

R   + 1000

R + 1000

S - 1000

How much did M change?                                given : r = .1

                                                                e = .06

                                                                c = .2

MB = C + R        ↑ 1000

M = mm  MB

 1000

        ⤷  = =  = 3.33

m = 3.33 (+1000) = +3330

Buying securities from general public for $1000, pays w/ a check that the seller deposits  into checking account at commercial bank

        

Fed

bank

public

A

L

A

L

A

L

S + 1000

R + 1000

R + 1000

D + 1000

D + 1000

DL

S

DL

S - 1000

What happened to banks reserves?                 + 1000

Change in M?

Mm = 3.33

        M = mm MB                        3.33 (+ 1000) = +3330

  • 1000

Open market purchase ⟶ increase M

                *vice versa                        ↳ by amount of mm times amount of purchase

The Reserve Ratio

Increase in reserve ratio - mm smaller, M smaller

Decrease - mm larger, M larger

*e = .06

c = .2

        r = .1                                r = .15                                r = .05

MB = 10000                                MB = 10000                        MB = 10000

MM = 3.33                                MM = 2.93                        MM = 3.87

M = 33.300                                M = 29.300                        M = 38.700

Discount Rate

   ↳ interest rate banks have to pay when they borrow money for the Fed

what happens when bank borrows $1000 from Fed?

Fed

bank

A

L

A

L

DL + 1000

R + 1000

R + 1000

D + 1000

                        

↓dr        ➝ ↑D.L        ➝ ↑K         

  • Decrease in discount rate makes bank want to borrow more and lend it to public at same interest rate as before

Expansionary monetary policy (easy money) - involve open market purchases decrease in reserve ratio, decrease discount rate

Distinctive monetary policy (tight money) - involve open market sales, increase in reserve ratio, increase in discount rate

Open market operations - most important changes in reserve requirement - used infrequently changes in discount rate - may be frequent but less important than open market operations

Demand for money

        The transactions demand, Dt, depends primarily on the level of nominal ADP

The alset demand, Da, varies inversely with the interest rate

Total demand for money.                 Dm = Dt + Da

Demand curve for money slopes downward w/ respect to interest rate

Supply or money

  • Determined by monetary authorities & does not depend on interest rate
  • Supply of money curve is vertical

Equilibrium of money

10/19/17

Quantity theory of money predicts that an increase in the money supply will result in a proportional increase in the price level

Equation of exchange:

MV = PY

M = Money supply

P = price level

Y = level of real output of goods & services, ie real GDP

PY = nominal GDP

MV = amount of dollar spending on those goods & services

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