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MGMT 121 Feb 26-March 4, 2016

by: Manny Sandhu

MGMT 121 Feb 26-March 4, 2016 MGMT 121

Marketplace > University of California - Merced > MGMT 121 > MGMT 121 Feb 26 March 4 2016
Manny Sandhu
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About this Document

These notes are covering Open Market Operations
Money & Banking
Dr. Cook
Class Notes




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This 4 page Class Notes was uploaded by Manny Sandhu on Friday February 26, 2016. The Class Notes belongs to MGMT 121 at University of California - Merced taught by Dr. Cook in Spring 2016. Since its upload, it has received 24 views.

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Date Created: 02/26/16
Open Market Operations Central Bank Independence  2 Types: 1)Instrument= free to choose instruments —i.e. interest rates + monetary aggregates —Tools—>Instruments—> Goals 2)Goal=free to choose goals —i.e low unemployment +/or price stability ­Fed is free in both dimensions. ­Fed is free from budgetary pressures Freedom of Fed can be adjusted by legislation ­the central bank of the EU was set up by a treaty, so any changes must be ratified by all  members. Pros of Independence ­Political Business Cycle ­If politicians ran the central bank —>expansionary policy before elections —not based on any economic conditions —>Contractionary policy immediately after election (If ever).  ­Politicans vs Economists —Economists are experts, politicians are not. Cons of Independence  —Politicans vs Economics ­politicians are responsible to voters ­econ generally comes from ivory towers and not the real world. CH 14 3 players in the money supply  1)The fed, 2)Banks, 3) Depositors ­The fed—> controls the monetary base  ­Banks & Depositors —> Influence the money multiplier. Balance Sheet ­compare assets to liabilities  —asset= something of value  —liability= something owed 1.) Fed’s BS Assets / Liabilities Securities/ Currency Loans to banks/Reserves monetary base = liabilities of the fed monetary base = C + R ­MB is the concentration of Money supply­ M^s —Kool­Aid mix Liabilities of Fed 1a)Currency= federal reserve notes ====IOU notes from the Fed. —formerly backed by an equivalent of gold+silver, now backed notes. b)Reserves = deposits by banks held at the Fed. ­all banks are required to hold a fraction of deposits as reserves Ex: TR = IS RR= 10 D=100 ******What is the required reserve ratio? 10/100 = 0.1 or 10% Reserves held in excess of what is required are called excess reserves.  ­How much ER above? TR­RR=15­10=5=ER 2) Bank BS: Assets/Liabilities Securities/Loans from Fed Reserves/ Deposits 3)Public (or Depositors) BS: Assets/Liabilities Securities/ Deposits/ Currency/ Open market operations: ­Fed buys bond from stock 1) Fed buys bond from bank 2) Initially Bank’s BS A/L $100 Sec/  Fed buys 100 of sec by increasing the bank’s reserves by an equal amount fed a/l +100 sec / +100 res What happens to MB? M^s? MB= Currency + Reserves; R increases by 100 so MB increases by 100 ­If MB increases then Money supply increases, c.p. What happens to interest rate?** There is a graph 2)OMP  from depositors ­100 Dollar purchase ­assume purchase held as deposit 2 hints: ­100 dollar purchase ­assume purchase held as deposits ­assume change in deposits held as reserves Deposites A/L ­100 sec +100 Deposits Bank A/L +100 Reserves/+100 Deposits Fed A/L +100 sec/+100 Res Open Market Sales


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