ECO 2013 Lecture Notes - Lecture 24: Monetary Base, Monetary Policy, Money Supply

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azuremacaw708

16 Nov 2017

School

University of Florida

Department

Economics

Course

ECO 2013

Professor

David T Knight

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Document Summary

Monetary policy: economic policy conducted by the central bank that operates through changes in the money supply and interest rates. Money supply: total amount of money (ie super liquid assets) available in the economy. Monetary base: currency available to or held by the public or in commercial banks" accounts at the central bank. Money multiplier: the amount by which the money supply would increase or decrease with a increase or decrease in the monetary base. Change in money supply divided by the change in monetary base > 1. Currency (monetary base), checking account deposits, travelers" checks: m2. The money multiplier and the reserve requirement: change in money supply over change in monetary base = 1/(fraction of deposits the banks hold as reserves) The federal reserve system: the fed headquarters in d. c. The board: 12 regional federal reserve banks, federal open market committee. Monetary policy tools: open market operations. Open market sales: reserve requirement, discount policy.

Related Questions

Suppose households hold $0.30 in currency for every $1 they have as demand deposits (checking accounts). Also, banks hold 20% of their deposits as reserves.

A. If the Federal Reserve buys $10 of government bonds from banks, by how would would the following change (include a minus sign if the value falls)?
i. the money supply (M1)
ii. the monetary base

B. Instead of Bonds being sold, suppose that households chose to hold less in currency and more in demand deposits. Explain how that would change
i. Money supply (M1)
ii. the monetary base

viridianserval415

Explain completely the mechanism through which a change in the following will change the money supply, M1.

A) an increase in c

B) an increase in rd

C) a decrease in e

D) an increase in the federal funds rate

Refer to following: M1 = (m) * [MB] = m * (MBn + BR)

Where,

m = [(1 + c)/(rd + c + e)]

And MB = MBn + BR

Where MB = Monetary base = C + R

C = Currency in Circulation

R = Bank Reserves

MBn = Non-borrowed Monetary Base

BR = Borrowed Reserves = Borrowed Reserves from the Federal Reserve System

m = money multiplier

c = C/D = currency ratio

rd = required reserve ratio against deposits

e = ER/D = Bank precautionary reserve ratio

taupesheep43

In a country the monetary base is 1000. People hold one-fourth of their money in the form of currency (and thus three-fourths as bank deposits). Banks hold a third of their deposits in reserve.

a) What is reserve-deposit ratio, currency-deposit ratio, the money multiplier, and the money supply?

b) One day, Government passed a new rule that people needs to pay tax on their currency holdings, and people now want to hold one-fifth their money in the form of currency (and thus four-fifths as bank deposits). If the central bank does nothing, what is the money supply?

c) The central bank wants to conduct an open market operation to keep the money supply at its original level, does it buy or sell government bonds? Calculate how much the central bank needs to transact.

ECO 2013 Lecture Notes - Lecture 24: Monetary Base, Monetary Policy, Money Supply

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Related textbook solutions

Principles of Economics

Principles of Macroeconomics

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