Unit 4: Tools of Monetary Policy

4/3/17

1.  Open market operation -  when the Fed buys or sells government bonds, this is the most important and widely use monetary policy
-  if the Fed buys bonds out of the economy and replaces it with money MS increases
-  if the Fed sells bonds it takes money and give security to the investors therefore MS decreases

2.  Reserve requirement -  Dollar amount that must be kept back

• The Fed sets of the amount in the bank must hold
•  The loan eventually become still posits for another bank that will loan out their excess reserves
• - if there is a recession, what should the fat Jew to the reserve requirement ?

•  decrease the reserve ratio ,  Banks hold less money and have more excess reserves, banks create money by loaning out excess reserves, money supply increases, interest rates fall, AD goes up
•   and if there is an inflation ?
•  increase the reserve ratio -  Bank equals more money less excess reserves, creates less money, MS decreases, Ir increases, AD decreases

3.  The discount rate 
-  there are many different interest rates, but they tend to all  rise and fall together
-  The discount rate is the interest rate that the Fed places
-  The federal funds rate is the interest rate that banks charge one another for overnight loans
-  The prime rate is the interest rate that banks charge their most credit worthy customers

4/04/17
Loanable  funds market 
- The private sector supply and demand loans
-  this market bring some gather those who want to lend money and those who want to borrow
-  this market shows the effect on the real interest rate
-  demand -  inverse relationships between real interest rate and quantity loans demanded

I

-  supply -  Direct locations to between real interest rate and quantity loan supplied

Here's a video discussing monetary policy and more!

Unit 4: Money creation formula

3/27/17 

• A single can create money by the amount of excess reserves
• The banking system as a whole can create money by a multiplier of excess reserves
• MM x ER = expansion of money 
• Money multiplier= 1/RR
• New Existing Money

- if the initial deposit in a bank comes from the fed or a bank purchase of a bond or other money out of circulation (buried treasure) The deposit immediately increases the money supply
- The deposit then leads to further expansion  of the money supply through the money creation process
-Total change in MS if the initial deposit is new money= deposit+money created by banking system
-if a deposit in a bank is existing money (already counted in M1 ) depositing the amount does not change the MS immediately because it is already counted.
-Existing currency deposited into a checking account changes only the composition of the Money supply from coins/ paper money to checking accounts deposits
- Total change in the MS if deposit is existing money = banking system created money only.

3/29/17

Money Creation Process 

-$1000 in cash is deposited in a checking account ->  no immediate change in MS ->Assets
- $1000 fed  purchase of bonds from the public deposited into the checking account ->  immediate increase in MS in $1000 ->  liabilities
- Single bank - amount of money they can loan out of ER
- banking system - can create money by a multiplier of its initial excess reserve (ER x MM)
-  total change in the money supply as a result of the initial deposit.

https://www.youtube.com/watch?v=JG5c8nhR3LE ( A video elaborating on the money creation process)