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MaC BGIE4 central bank   azcona
MaC BGIE4 central bank   azcona
MaC BGIE4 central bank   azcona
MaC BGIE4 central bank   azcona
MaC BGIE4 central bank   azcona
MaC BGIE4 central bank   azcona
MaC BGIE4 central bank   azcona
MaC BGIE4 central bank   azcona
MaC BGIE4 central bank   azcona
MaC BGIE4 central bank   azcona
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MaC BGIE4 central bank azcona

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  • This is an example of open market purchasePrimary dealers are about 20 large securities firms (banks or broker-dealers) authorized to trade with the FedTypically banks will use the new excess reserves to make additional loans  money supply will eventually rise by more than $5
  • Savings accounts are also referred to as “near money”Excess reserves are also referred to as “customary reserves”In previous example, with those two extreme assumptions, the money multiplier equals 1/(reserve ratio)= 1/(10%) = 10. Under normal circumstances it is smaller than that.
  • Required reserve ratio and preferred asset ratios determine how much banks can lend
  • This is an example of open market purchasePrimary dealers are about 20 large securities firms (banks or broker-dealers) authorized to trade with the FedTypically banks will use the new excess reserves to make additional loans  money supply will eventually rise by more than $5
  • Transcript

    • 1. MaC BGIE4: Central Banks & Monetary Policy Tools April 4, 2012Prof. Nestor Azcona
    • 2. S&P 500 Stock Market Index
    • 3. Interest Rate on 5-year Treasury Note
    • 4. Monetary Aggregates Central Bank Assets Liabilities Bonds Bank Reserves Monetary Other Currency in Circ. Base Other Banking System Non-Bank Public Assets Liabilities Assets Liabilities Bank Reserves Deposits M2 Currency in Circ. LoansBank MoneyReserves • Vault Cash Other Supply Bank Deposits Other • Deposits at CB Other Net Worth Loans
    • 5. The M1 & M2 Money Multipliers M1 Money Supply 720M1 Money Multiplier 3 Monetary Base 220 20 M1 Money Supply 1080M2 Money Multiplier 4.5 Monetary Base 220 20
    • 6. The Money MultipliersM2 Money Supply = M2 Money Multiplier Monetary Base• How much money banks create (by making loans) depends on: – Central Bank’s Required Reserve Ratio (rr) – Households’ Currency to Checking Deposits ratio (Cc/D) – Households’ Near Money to Checking Deposits ratio (N/D) – Banks’ Excess Reserves to Checking Deposits ratio (U/D) (Excess Reserves = Customary Reserves)
    • 7. How Does the Fed Control the Money Supply?M2 Money Supply = M2 Money Multiplier Monetary Base • Required Reserve Ratio (Fed) • Preferred Asset Ratios (Others) • Open Market Operations (Fed) • Foreign Exchange Interventions (Fed) • Discount Loans (Fed)
    • 8. How Does the Fed Create Money “Out of Thin Air”? Banking System Central Bank Assets Liabilities Assets LiabilitiesReserves $10 Deposits $20 Bonds $10 Bank Reserves $10Loans $10 Currency in Circ $0M2 Money Supply Currency in Circ. + Deposits $20Monetary Base Currency in Circ. + Reserves $10
    • 9. How Does the Fed Create Money “Out of Thin Air”? Banking System Central Bank Assets Liabilities Assets Liabilities Reserves $10+$5 Deposits $20+$5 Bonds $10+$5 Bank Reserves $10+$5 Loans $10 Currency in Circ $0• Fed buys $5 Treasury bond from “primary dealer”• Fed pays with new bank reservesM2 Money Supply Currency in Circ. + Deposits $20+$5Monetary Base Currency in Circ. + Reserves $10+$5
    • 10. Takeaway Points• Central Bank can change money supply by changing monetary base or by changing required reserve ratio• Only the central bank can change the monetary base• Money supply can also change if preferred asset ratios change

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