ECON 202 Lecture Notes - Lecture 5: Money Multiplier, Reserve Requirement, Open Market Operation

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Currency in circulation: in the hands of the public. Reserves: bank deposits at the cb and vault cash: assets. Discount loans: bank borrowings from the cb, i. e. , borrowed reserves, at the discount rate. The monetary base (mb) equals currency in circulation (c) plus the total reserves in banking system (r): R is total reserves which consist of deposits at the cb plus currency that is held in bank vaults (or vault cash). Total reserves = required reserves + excess reserves. The cb exercises control over the mb through open market operations, and through its extension of discount loans to banks. An open market purchase is a purchase of bonds by the cb. An open market sale is a sale of bonds by the cb. Suppose that the cb purchases of bonds from a bank and pays for them with a. Let"s look at a t-account: reserves increase by , hence, monetary base (mb) increases by .

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