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This 3 page Class Notes was uploaded by Jessica Ralph on Thursday April 21, 2016. The Class Notes belongs to ECO 2013 at Florida State University taught by Joab Corey in Spring 2016. Since its upload, it has received 84 views. For similar materials see Macroeconomics in Economcs at Florida State University.
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Date Created: 04/21/16
4/19/16 chapter 13 continued Value of money The value of money is determines by demand relative to supply 2 ways to determine the value of money o M1= currency + checkable deposits + traveler checks o M2 = M1 + saving deposits + time deposits (less than $100,000) + money market mutual funds Savings account: interest bearing holding account at a bank Time deposits: financial accounts with a minimum time requirement (CD) Money market mutual funds: interest earning accounts that pool depositors funds and invest them in highly liquid short-term securities IF YOU TAKE MONEY FROM YOUR SAVINGS ACCOUNT AND PUT IT INTO CHECKING, M1 INCREASES. M2 STAYS THE SAME M2 is a broader definition of money (less liquid) The central bank Central bank: an institution that regulates the banking system and control the money supply o Central bank in the US is called the federal reserve system (fed) Independent of the government o Carries out regulatory policies o Conducts monetary policy Bank reserves: vault cash + deposits with the Fed Fractional reserve banking: a system that permits banks to hold reserves of less than 100% against depositors Required reserves: the minimum amount of reserves that a bank is required by law to keep on hand to back up its deposits Federal deposit insurance corporation (FDIC): a federal corporation that insures deposits up to $250,000 How banks create money Required reserve ration: percentage of deposits that banks are requires to hold as reserves o Excess reserves: actual reserves that exceed the legal requirement Potential deposit expansion (money) multiplier: the maximum potential increases in the money supply as a ration of new reserves injected into the banking system o Money multiplier = inverse of required reserve ration 1/ money multiplier Lower required reserve ration, the more money supply will expand Actual deposit multiplier New currency reserves will NOT expand money supply by as much as the potential multiplier indicates for 2 reasons: o The effect of the deposit multiplier will be reduced if 1. Some people decide to hold currency rather than deposit it in the bank 2. Banks fail to use all of the new excess reserves to extend loans The Federal Reserve System The fed is instructed by congress to conduct monetary policy in a manner that promotes: o 1. Full employment o 2. Price stability Federal Open Market Committee FOMC: determines the feds policy with respect to the purchase and sale of government bonds o Open market operations: buying and selling of bonds on the open market by the Fed How the fed controls the money supply 1. Open market operations o to increase money supply buy bonds o decrease money supply sell bonds 2. Reserve requirements o lower reserve requirements increase money supply o increase in reserve requirements reduce supply of money 3. Extension of loans o discount rate: interest rate the Fed charges banking institutions to borrow funds o federal funds rate: interest rate that commercial banks charge each other banks are more likely to try and borrow from other banks before borrowing from the Fed o when the fed extends more loans, money supply increases o fed extends less loans, money supply decreases 4. Interest paid on excess bank reserves o reducing the interest paid on excess reserves increases the money supply o increasing the interest paid on excess reserves reduces the money supply Federal reserve Expansionary Restrictive policy policy policy Open market Purchase government Sell government operations bonds bonds Reserve requirements Lower reserve Raise reserve requirements requirements Extension of loans Extend more loans Extend less loans Interest paid on Reduce the interest Increase the interest excess reserves paid on excess pain on excess reserves reserves
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