ECON 2105 Lecture Notes - Lecture 8: Open Market Operation, Demand Curve, Money Supply

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azurearmadillo481

15 Mar 2017

School

University of Georgia

Department

Economics

Course

ECON 2105

Professor

Till Schreiber

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Document Summary

Econ 2105 - lecture 8: the demand for money. Demand for money: what people desire to hold in currency and bank deposits given their total wealth: depends on the interest rate. Supply of money: the quantity of money, currency, and bank deposits, set by the fed: controlled by the fed through open market operations. When the fed buys treasury bonds, the reserve increases; when they sell bonds, the reserve decreases. Interest rate is a price you have to pay to borrow money: adjusts to balance the supply and demand for money, fed controls interest rates by changing the supply of money. Low interest rates stimulate spending on plant, equipment (investment spending) and consumer durables. High interest rates discourage spending because affect gdp and employment: in turn, affects prices and wages too. To slow down the economy, the fed aims to increase interest rates. The quantity of money we demand depends on: interest rate: the cost of holding money.

Related Questions

Explain how each of the following events affects the monetary base, the money multiplier, and the money supply.

a. The Fed increases the interest rate it pays banks for holding reserves. When the Fed increases the interest rate, it pays banks to hold reserves.

b. All money is held as demand deposits. Banks hold 20 percent of deposits as reserves.

c. People hold equal amounts of currency and demand deposits. Banks hold 20 percent of deposits as reserves.

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Suppose the money supply (as measured by deposits) is currently $250 billion. The reserve requirement is 20%. Bank holds $50 billion in reserves, so there are no excess reserves.

The federal reserve ("the fed") wants to increase the money supply by $25 billion, to $275 billion. It could do this through open market operations or by changing the reserve requirement. Assume for this question that you can use the deposit expansion multiplier.

1. If the fed wants to increase the money supply using open market operations it should ___(buy/sell) _____worth of U.S. government bonds.

2. Banks, as financial intermediaries, create value for depositors such as Yvette by doing which of the following? (Check all that apply)

A. Create networks

B. Keep credit rates low pay interest

Match the correct motive for holding money to the following definitions:

A. Transactions demand for money

B. Precautionary demand for money

C. Speculative demand for money

3. The stock of money people hold to pay unpredictable expenses

4. The stock of money people hold to pay everyday predictable expenses

5. The stock of money people hold to take advantage of future changes in the price of non-money financial assets

Identify the motive for holding money in the following scenario.

6. Brain recently moved from a commission-based sales job.

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6. Other things beingâ equal, the M1 money supply varies in the same direction as the magnitude of

A.âk, theâ currency/DDO ratio

B.rrâ , the average required reserve ratio

C.âre, theâ banksâ desired excess reserves ratio

D.none of the above

7. Suppose that discounts and advancesâ (Fed loans of reserves toâ banks) increaseâ $200 million, Treasury deposits at the Fed increaseâ $500 million, and the Fed buysâ $700 million of Treasury bills from dealers. The net effect of these 3 transactions is to

A.increase bank reserves byâ $1,000 million

B.increase bank reserves byâ $1,400 million

C.increase bank reserves byâ $400 billion

D.leave bank reserves unchanged

8. Other things being equalâ (assuming the Fed takes noâ action), a sharp increase in interest rates caused by market forces in a strong economic recovery is likely to

A.increaseâ k, the currencyâ ratio, thus reducing the money supply

B.reduce the monetaryâ base, thus increasing the money supply

C.reduce reâ , the desired excess reserveâ ratio, thus increasing the money supply

D.do none of the above

9. The Federal Reserve is able to control most accurately in the short run

A.âB, the monetary base

B.âk, the currency ratio

C.reâ , theâ bankâs desired excess reserve ratio

D.M1, the U.S. money supply

10. The Federal Reserve implementedâ âoperation twistâ inâ 2011-2012 by

A.simultaneously buyingâ long-term and sellingâ short-term Treasury securities

B.heavy purchases of bothâ long-term andâ short-term Treasury securities

C.lowering the federal funds rate target and buyingâ long-term bonds

D.purchasingâ short-term securities and buyingâ mortgage-backed bonds

11. Duringâ 2008-2014, Fed Chairman Ben Bernanke drew a lot of criticism for

A.maintainingâ short-term interest rates at extremely low levels for an extended period

B.bailing out large banks that would otherwise have failed

C.conducting the quantitative easing policy for about six years

D.all of the above

ECON 2105 Lecture Notes - Lecture 8: Open Market Operation, Demand Curve, Money Supply

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