ECON 3580 Lecture Notes - Lecture 15: Floating Exchange Rate, Money Supply
Document Summary
Central bank intervention and the money supply: to study the effects of central bank intervention in the foreign exchange markets, first construct a simplified balance sheet for the central bank. This records the assets and liabilities of a central bank. Balance sheets use double-entry bookkeeping: each transaction enters the balance sheet twice. Loans to domestic banks (called discount loans in us: liabilities. Currency in circulation (previously central banks had to give up gold when citizens brought currency to exchange: assets = liabilities + net worth. If their deposits at the central bank increase, banks are typically able to use these additional funds to lend to customers, so that the amount of money in circulation increases. Assets, liabilities, and the money supply: a purchase of any asset by the central bank will be paid for with currency or a check written from the central bank, Both of which are denominated in domestic currency, and.