ECON 1115 Lecture Notes - Lecture 22: Term Auction Facility, Reserve Requirement, Excess Reserves

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cerisegiraffe538

13 Jul 2015

School

Northeastern University

Department

Economics

Course

ECON 1115

Professor

Gerald Porter( G)

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Document Summary

Econ 1115: principles of macroeconomics- lecture 22: monetary policy. Fed can buy or sell treasury bills. If the fed wants to increase money supply, fed should buy treasury bills. They collect all the bills and give out to other banks. By selling treasury bills, fed decreases money supply. If the commercial banks ran out of reserve they will borrow money from other commercial banks. If all commercial banks run out of money, they can borrow from the discount windows. Interest rate fed charges on those loans are called discount rate. If the fed wants to increase money supply, fed should decrease the discount rate. Lower discount rate encourages banks to borrow money from the fed more loans = more money circulating in the economy. If the fed wants to increase money supply, fed should set a lower reserve ratio. Lower = commercial banks only need to hold small fraction of their reserve.

Related Questions

Which of the following best explains why raising the discount rate affects the money supply?

A. When the discount rate is high, banks are able to charge lower interest rates so that more people can afford to take loans.

B. When the discount rate is high, banks keep more reserves on hand to avoid paying a lot to borrow from the Fed.

C. When the discount rate is high, banks have less incentive to give loans because they make less profit on these loans.

D. When the discount rate is high, banks can loan out a larger portion of their reserves.

lilacbadger994

The Fed wants to increase the money supply (which is currently $5,000) by $350. The money multiplier is 4, and people hold no cash. For each 1 percentage point the discount rate falls, banks borrow an additional $10. Explain how the Fed can achieve its goals using the following tools:

a. Change the reserve requirement.

Instructions: Enter your response rounded to the nearest whole number.

The Fed should (Click to select)lower raise the reserve requirement to percent.

b. Change the discount rate.

Instructions: Enter your response rounded to two decimal places.

The Fed should (Click to select)lower raise the rate by percentage points.

c. Use open market operations.

Instructions: Enter your response rounded to two decimal places.

The Fed should (Click to select)sell-buy $ worth of bonds.

yellowcrow621

1. Which of the following both increase the money supply?

an increase in the discount rate and an increase in the interest rate on reserves
an increase in the discount rate and a decrease in the interest rate on reserves
a decrease in the discount rate and an increase in the interest rate on reserves
a decrease in the discount rate and a decrease in the interest rate on reserves

2. In the U.S., the average adult holds about $3,700 in

currency.
wealth.
M1.
M2.

3. The measure of the money stock called M1 includes

wealth held by people in their checking accounts.
wealth held by people in their savings accounts.
wealth held by people in money market mutual funds.
everything that is included in M2 plus some additional items

4. When the Fed decreases the discount rate, banks will

5. Reserve requirements are regulations concerning

the amount banks are allowed to borrow from the Fed.
the amount of reserves banks must hold against deposits.
reserves banks must hold based on the number and type of loans they make.
the interest rate at which banks can borrow from the Fed.

6. When we say that trade is roundabout we mean that

people sometimes trade goods for goods.
trades require a double coincidence of wants.
currency is accepted primarily to make further trades.
people must spend time searching for the products they wish to purchase.

7. Values of Assets

Asset	Amount in $Billions
Small-time deposits	780
Large time deposits	1,700
Demand deposits	450
Other checkable deposits	370
Savings deposits	4950
Traveller's checks	5
Money market mutual funds	740
Currency	880
Miscellaneous categories of M2	50

Refer to Value of Assets. What is the value of M1 in billions of dollars?

1705
2485
6295
7075

8. In 1991, the Federal Reserve lowered the reserve requirement from 12 per cent to 10 per cent. Other things the same this should have

increased both the money multiplier and the money supply.
decreased both the money multiplier and the money supply.
increased the money multiplier and decreased the money supply.
decreased the money multiplier and increased the money supply.

9. Consider four survivors on an island.

Rupert	has machete	wants fishing spear
Amber	has cooking pot	wants fishing spear
Rob	has fishing spear	wants machete
Tom	has cooking pot	wants machete

Which of the following pairs of survivors has a double-coincidence of wants?

Rupert with Amber, and Rob with Tom
Amber with Tom
Rupert with Rob
None of the above is correct.

10. Economists use the term money to refer to

all wealth.
all assets, including real assets and financial assets.
all financial assets, but not real assets.
those types of wealth that are regularly accepted by sellers in exchange for goods and services.

crimsongrasshopper834

ECON 1115 Lecture Notes - Lecture 22: Term Auction Facility, Reserve Requirement, Excess Reserves

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