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ECON 161A Lecture Notes - Lecture 11: United States Treasury Security, Discount Window, Primary Dealer

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School
UC-Irvine
Department
Economics
Course
ECON 161A
Professor
Gwen Jenkins

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Document Summary

The fed"s balance sheet & the money supply: The feds have liabilities like when we take out loans or when banks take out deposits. A single bank might choose to choose reserves, but the fed"s determine the supply. These two liabilities of the fed comprise the monetary base (mb): High-powered money ; reserves are not part of money supply, they"re apart of the monetary bank or money in circulation; r is not actually money which makes this equation kind of confusing. The fed can control mb but they can"t control the amount of currency in circulation or the amount of reserves. You can take all the cash out of your account, and the fed can"t do anything about that; they can set the minimum that a bank can hold. Bank reserves; from an individual bank, they take deposits and put it into the fed; so they"re liabilities in respect to these banks.

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Related Questions

1. In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves.

2. If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply.

3. Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply(decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases).

4. If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much?

 

1. (0.2 pt) In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves. 

2. (0.2 pt) If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply. 

3. (0.2 pt) Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply (decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases). 

4.(0.2 pt) If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much? (Make sure to show all your work.)

In July of this year (2015), Janet Yellen said the following in her testimony before the House Committee on Financial Services:

If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy.

In raising the federal funds rate, the Fed would likely start to sell some of the Treasury securities that it holds.

a. How would this change in policy affect the size of the Feds balance sheet? In your answer, discuss how each side of the balance sheet (assets and liabilities) would change. Would one or both sides increase or decrease?

b. Suppose the Fed sells $1 billion worth of Treasury securities to banks. How would this action change the size of the monetary base? If banks are required to hold 10% of their deposits as reserves, what would be the final change in the money supply (assume we're talking about M1) as implied by the money multiplier?

c. Is the change in the money supply that you calculated in part (b) likely to occur in reality? Why or why not? Would you expect the actions of the Fed to have any meaningful influence on the size of the money supply at this point in time? Hint: For the last part of this question, you might think about the factors that influence a bank's decision to lend as well as the current supply of excess reserves in the banking system (see https://research.stlouisfed.org/fred2/series/EXCSRESNS).