Term
| The 3 players in the Money Supply process |
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Definition
• Central Bank: the Fed
• Banks(depository institutions; financial intermediaries)
• Depositors (individuals and institutions) |
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Term
| Federal Reserve System Assets vs. Liabilities |
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Definition
Assets
- Government securities
- Loans to financial institutions (discount loans)
Liabilities
- Currency in circulation
- Reserves |
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Term
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Definition
– Currency in circulation—in the hands of the public
– Reserves—bank deposits at the Fed and vault cash |
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Term
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Definition
– Government securities—holdings by the Fed that affect money supply and earn interest
– Discount loans—provide reserves to banks and earn the discount rate |
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Term
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Definition
| The sum of the Fed's monetary liabilities and the US Treasury's monetary liabilities |
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Term
| High Powered Money formula |
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Definition
Monetary Base
MB= C (currency in circulation) + R (total reserves in the banking system) |
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Term
| How is the Monetary base changed? |
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Definition
• The Fed changes the monetary base by changing the levels of its assets.
• In an open market purchase the Fed buys government bonds and increases the base.
• In an open market sale the Fed sells government bonds and decreases the base.
• The Fed can also change reserves and the base through changes in discount loans. |
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Term
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Definition
| Purchases or sales of securities in the open market |
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Term
| What is the result (Balance sheet) of am open market purchase from a bank? |
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Definition
Banking System
Assets Liabilities
Securities -$100
Reserves +$100
Federal Reserve System
Assets Liabilities
Securities +$100 Reserves +$100 |
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Term
| What is the net result of an open market purchase from a bank? |
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Definition
• Net result is that reserves have increased by $100
• No change in currency
• Monetary base has risen by $100 |
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Term
| Open Market purchase from nonbank public (deposited the check) |
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Definition
Banking System
Assets Liabilities
Reserves +$100 CD's +$100
Nonbank Public
Assets Liabilities
Securities -$100
CD's +$100 |
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Term
| Result from an open market purchase from nonbank public (deposits checks) |
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Definition
• Person selling bonds to the Fed deposits the Fed’s check in the bank
• Identical result as the purchase from a bank |
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Term
| Open market purchase from nonbank public (cashes checks) |
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Definition
Federal Reserve system
Assets Liabilities
Securities +$100 Currency in Circ +$100
Nonbank Public
Assets Liabilities
Securities -$100
Currency +$100 |
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Term
| Results of open market purchase from a nonbank public (cashes checks) |
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Definition
• Reserves are unchanged
• Currency in circulation increases by the amount of the open market purchase
• Monetary base increases by the amount of the open market purchase |
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Term
| Open Market purchase summary |
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Definition
• The effect of an open market purchase on reserves depends on whether the seller of the bonds keeps the proceeds from the sale in currency or in deposits
• The effect of an open market purchase on the monetary base always increases the monetary base by the amount of the purchase |
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Term
| Open Market sale (balance sheet) |
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Definition
Nonbank Public
Assets Liabilities
Securities +$100
Currency -$100
Federal Reserve System
Assets Liabilities
Securities -$100 Currency in Circ -$100 |
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Term
| Shifts from Deposit into Currency |
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Definition
Nonbank Public
Assets Liabilities
CD's -$100
Currency +$100
Banking System
Assets Liabilities
Reserves -$100 CD's +$100
Federal Reserve System
Assets Liabilities
Currency in Circ. +$100
Reserves -$100 |
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Term
| Shifts from Deposit into Currency (explanation) |
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Definition
| • Net effect on monetary liabilities is zero; Reserves are changed by random fluctuations; Monetary base is a more stable variable |
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Term
| Discount Loan to Financial Institutions |
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Definition
Banking System
Assets Liabilities
Reserves +$100 Discount Loans +$100
Federal Reserve System
Assets Liabilities
Discount Loans +$100 Reserves +$100 |
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Term
| Results of discount loans to financial institutions |
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Definition
• Monetary liabilities of the Fed have increased by $100
• Monetary base also increases by this amount |
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Term
| Who controls open market operations? |
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Definition
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