4.6 part 2 - Monetary Policy - AMPLE Reserves

Reserves

funds that banks have (in Federal Reserves + Commercial Banks’ Required Reserves)

NOT considered money

2008 Recession

Since ____, bank reserves (Monetary Base) dramatically increased

US went from SCARCE reserve system to AMPLE reserve system

Upper Bound of Reserves Market Graph

highest part of Reserve Demand curve (set at discount rate)

Discount rate shfits this

Lower Bound of Reserves Market Graph

lowest part of Reserve Demand curve (set at Interest on Reserves Rate)

IOR shifts this

Interest on Reserves

• interest that FED gives banks for their excess reserves

• more reserves = more interest!

• shifts Reserve Demand curve’s LOWER BOUND and POLICY RATE (equilibrium)

_____ increase = PR increase

Policy Rate

interest rate that banks charge each other

synonymous with Federal Funds Rate in US

Reserve Supply (Curve)

= reserves at the Federal Bank + reserves at Commercial Banks

Open Market Operations

• the purchase and sale of securities in the open market by the FED

• shifts Reserve Supply curve

• maintains Ample Reserves supply

• with Ample reserves, ___ does NOT change policy rate

Monetary policies that work in a Scarce/Limited Reserve System

1. Required Reserves

2. Discount Rate

3. Open Market Operations

Monetary policies that work in an Ample Reserves system

1. Interest on Reserves

Discount Rate

• does NOT change policy rate

• only moves upper bound

• won’t change equilibrium

Expansionary Monetary Policy

• fight unemployment

• LOWER IOR to increase investment and other interest rate sensitive spending (car, college, housing, etc)

• INCREASES employment and real output (AD→)

  • more INCOME

Contractionary Monetary Policy

• fight INFLATION

• RAISE IOR to DECREASE investment and other interest rate sensitive spending (car, college, housing, etc.)

• DECREASES PRICE LEVEL and LOWERS inflation (AD←)