AP Econ Unit 5 flashcards

What is Vault cash (aka Till $)

The % of reserves that CBs keep at banks in case

Transaction: public deposit $

+Res, +DD

Transaction: public withdraw $

-Res, -DD

Transaction: CB gives a loan to public

+loan, +res

-Money is created

-Sm increased

Transaction: Public uses money from loan

-Res, -DD

Transaction: Public pays loan back to CB

-Loan, -DD

-Money is destroyed

-Sm decrease

Assets is what you ____, liabilities is what you ____ net worth is what the ____ own

own, owe, shareholders

Transaction: CB buys securities from public

+Sec, +Res

-New money is created

-Sm increase

Transaction: CB sells securities to public

-Sec, -DD

-New money is destroyed

-Sm decrease

How can money expand in the banking system?

With the monetary multiplier

1/Reserve Ratio

MCP formula

Excess reserves x Monetary multiplier

What can limit the MCP?

-Banks don’t lend

-People don’t borrow

-People don’t redeposit $ (or they hold currency)

What are the steps to tracking a check

1: Bank the money goes to (+Res, +DD)

2: Fed bank (Res of each bank changes)

3: Bank the money leaves (-Res, -DD)

What are the two types of conventional monetary policy:

1: Easy money policy

2: TIght money policy

When do you use easy money policy

-During the recessionary phase

When do you use tight money policy

During an inflationary phase

What tools/actions does the Fed take in easy money policy? What will it do?

1: Decrease DR

2: Decrease Res Ratio

3: OMO: Buying securities

This will ↑ S_Lf and ↓ Real i

What tools/actions does the fed take in tight money policy? What will it do?

1: Increase DR

2: Increase Res Ratio

3: OMO: Selling securities

This will ↓S_{Lf and} ↑ Real i

What is the 5 graph analysis for easy money policy

• S_Lf ↑ Real i ↓

  • LF graph

IF CBS LEND, THEN….

• Sm ↑ Nom i ↓

  • MMG

• i ↓ Ig ↑

  • ID curve

• Ig ↑ x Mult= ↑ AD, ↑ POE

  • AS-AD curve

• Economic growth ↑

  • PPC

What happens to the value of the US dollar with easy money policy

As i ↓, the US bond market becomes LESS lucrative. This makes demand for US dollars Depreciate. This makes it cheaper here. X ↑ Xn ↑

What is the four graph analysis for tight money policy?

• S_Lf ↓ Real i ↑

  • LF graph

IF CBS STOP LENDING THEN…

• Sm ↓ Nom i ↑

  • MMG

• i ↑ Ig ↓

  • ID curve

• Ig ↓ x multiplier= ↓ AD, ↓ POE

  • AS-AD curve

• Economic growth ↓

  • PPC

What happens to the value of the US dollar with tight money policy

As i ↑ , the us bond market becomes MORE LUCRATIVE. This increases the demand for US dollars. This makes the dollar appreciate. This makes it more expensive here. X ↓ Xn ↓

On the Feds balance sheet, Loans to CBS are on the ___ side

asset

On the Feds balance sheet, Reserves of CBS are on the ___ side

Liabilities

On the Feds balance sheet, Securities are on the ___ side

asset

On the Feds balance sheet, currency is on the ___ side

liabilities

On the CBS balance sheet, Loans from Fed are on the ___ side

liabilities side

When does the Sm increase (new money created)?

-When Banks lend to public

-When Fed buys securities from public

When does Sm decrease (new money destroyed)

-When public repays loan to CB

-When Fed sells securities to public

Why is the public always involved with changes in Sm?

Because they are the only ones with demand deposits

Transaction: CB borrows from Fed

Fed: +Loan, +Res

CB: +Res, +Loan

Transaction: Feb buys securities from public

Fed: +Sec, +Res

Public: +DD -Sec

CB: +Res, +DD

Transaction: Fed sells securities to CBS

Fed: -Sec, -Res

CB: -Res +Sec

What is a fractional reserve system

-Bank holds only small % of customer deposits as reserves. This is by law. They lend out the rest as loans and expand the money supply

Do you sell government bonds in Tight/Easy money policy?

Tight

Do you lower the reserve ratio in Tight/Easy money policy?

easy

Do you raise the discount rate in Tight/Easy money policy?

Tight

Do you increase Net exports in Tight/Easy money policy?

Easy

Do you lower interest rates in Tight/Easy money policy?

easy

Does the Fed buy securities in Tight/Easy money policy?

easy

Does the Fed lower the discount rate in Tight/Easy money policy?

easy

Does Fed increase Reserve ratio in Tight/Easy money policy?

Tight

Does fed decrease net exports in Tight/Easy money policy?

Tight

Does fed increase interest rate in Tight/Easy money policy?

tight

What are the three tools of conventional monetary policy

-Change DR

-Change the reserve ratio

-Change OMO (to change the FFR)

During limited reserve time, what happens on a RMG when the Fed buys securities

-Fed injects reserves in CBS (money created)

-Supply of reserves increase

-Supply curve shifts right. FFR ↓

What happens on a RMG when the Fed sells securities

-Fed gets paid for bonds

-Reserves leave banking system (money destroyed)

-Supply of reserves shifts left. FFR ↑

What happens on a RMG when the Fed decreases the discount rate

-CB borrows more from Fed

-Supply of reserves increase

-Supply curve shifts right. FFR ↓

What happens on a RMG when the Fed increases the Discount rate during limited reserves

-Banks borrow less from Fed

-Supply of reserves decrease

-Supply curve shifts left. FFR ↑

In ample reserves time. What happens on a RMG when the Fed decreases the reserve requirement

-CB have more excess reserves

-Demand curve shifts down. FFR ↓

During ample reserve time, what happens on a RMG when the Fed increases the reserve requirement

-CB hold more reserves

-Demand curve shifts up. FFR ↑

When did the Fed have limited reserves

Prior to 2008. CBS kept very low amounts of reserves

During limited reserve time, what were the three conventional tools of monetary policy like? what was the relationship btwn Sr and FFR?

They were very effective. The focus of the tools was to change the Supply of reserves to influence FFR. SR and FFR had a inverse relationship

In a ample reserves time, why is FFR ineffective

Because the Fed gives CBS more reserves than they need. You can change the 3 tools of monetary policy and it will change the supply of reserves, but not the FFR.

How did the Fed get so many reserves in ample reserves? Why did the fed need to find other tools to control FFR? what tools

The Fed had to buy MBS from everyone or they would’ve gone out of business. The market was flooded, FFR was 0%, so reserves were unlimited. The fed needed to find other tools to control FFR, so they used administered rates and Interest on reserves (IOR)

What are administered rates

-Changing DR and IOR

-Fed controls Upper and lower bounds of FFR to maintain the target range

-The discount rate is ceiling of target range. By ↑ ↓ DR, Fed controls upper bound

-CBS will not lend to each other if DR is lower

What are interest on reserves

-Fed pays interest to CBS to keep reserves at the Fed

-This acts as a floor

-How fed controls the lower bound of FFR range

-As Fed raises IOR, banks will not lend to each other unless its above that rate

Banks will never ___ for more than the DR and never ___ for less than the IOR

borrow, lend

What is the dual mandate

Fed keeps maximum employment (Qf) and stable prices in economy

In a ample reserves time, During recession the fed can ____ administered rates, causing policy rates (FFR) to fall

Lower. ( ↓ DR and ↓ IOR)

For a ample reserves graph, Sr is in the

ample reserves side of the graph.

During inflation the fed can ____ administered rates, causing policy rates (FFR) to rise

increase. (↑ DR ↑ IOR)

For limited reserves graph you shift the ___ curve

SR. Sr curve must be in downward sloping line.

For recession in limited reserves, you shift curve…

right. ↓ Sr causing ↑ Pr

For inflation in limited reserves you shift the curve….

left. ↓ Sr causing ↑ PR

What are the problems with monetary policy

-operational lag

-administrative lag

-recognition lag

What is the difference between monetary and fiscal policy

AD= C + Ig+ G+ X+ Xn

Fiscal policy changes C and G with changing G and T

Monetary policy changes Ig with changing DR, OMO, Res ratio

Transaction: Fed sells securities to public

Fed: Sec -, Res -

CB: Res -, DD-

Transaction: Fed buys securities from public

Fed: Sec +, Res +

CB: Res +, DD+

Transaction: Fed sells securities to CB

Fed: Sec -, Res -

CB: Sec +, Res -

Transaction: Fed buys securities from CB

Fed: Sec+, Res+

CB: Sec -, Res +