ECON102 Lecture Notes - Lecture 31: Open Market Operation, Fractional-Reserve Banking, Credit Union
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ECON102 Full Course Notes
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Money: description, 3 functions medium of exchange, unit of account, store of value, 2 definitions m1, m2. Conduct open market operations: boc buys securities. Money to lend out: boc sells securities. How do banks influence the size of the money supplys: by making loans which creates new deposits, review the money creation process diagram on slide 39. If the interest rate were higher than equilibrium, there would be more money available than people require. People would reallocate their portfolios and buy more financial assets, bid up the price and the interest rate would fall. If the interest rate is below equilibrium: excess demand for money, sell bonds, bid down their price, interest rate rises. Reminder: interest rate and asset prices pg 548. The short run effect of a change in the supply of money (slide 55) Starting in equilibrium, if the bank increases the money supply, there is more money than people require.