Studied by 2 peoplehow monetary policy works in a limited reserves framework
Monetary policy works by changing the supply of excess reserves => changing the supply of money => changing the nominal interest rate
list 3 Limited Reserves monetary policy tools
required reserve ratio
discount rate
open market operations
how much does an OMO change a bank’s excess reserves?
by the entire amount of the purchase/sale b/c reserve requirement only applies to checkable deposits
purpose of buying bonds in an ample reserves framework
to maintain ample reserves
list 2 tools of ample reserves monetary policy
change administered interest rates:
Interest on reserves (IOR)
Discount rate
how do changes to IOR affect the reserve market model
increase IOR: move up the lower bound of demand for reserves
decrease IOR: move down the lower bound of demand for reserves
how do changes to discount rate affect the reserve market model
increase discount rate: move up the upper bound of demand for reserves
decrease discount rate: move down the upper bound of demand for reserves
explain the steps of expansionary monetary policy in ample reserves framework
administered interest rates decrease
policy rate decreases
other nominal interest rates decrease
Interest-sensitive spending increases
AD increases
explain the steps of restrictive/contractionary monetary policy in ample reserves framework
administered interest rates increase
policy rate increases
other nominal interest rates increase
Interest-sensitive spending decreases
AD decreases
Loanable Funds market
How much money in the form of loans consumers, businesses, and government are requiring, determined by expectation of return on investment
supply of loans in closed economy
Supply in closed economy = national savings
national savings equation
national savings = public + private savings
supply of loans in open economy
Supply in open economy = national savings + net capital inflow (money coming in from foreign investors)
what changes/shifts demand for loanable funds?
changes in return on investment
higher return = LD shifts right and interest rates increase
lower return = LD shifts left and interest rates decrease
what changes/shifts supply of loanable funds?
changes in savers’ behavior
saving increases = LS shifts right and interest rates decrease
saving deceases = LS shifts left and interest rates increase
What are excluded from the money supply?
currency (paper and coins) held by the U.S. Treasury, the Federal Reserve banks, commercial banks, and thrift institutions
checkable deposits of the government (specifically, the U.S. Treasury) or the Federal Reserve that are held by commercial banks or thrift institutions.
who owns each federal reserve bank?
the private commercial banks in its district
who makes up the FOMC?
The seven members of the Board of Governors.
The president of the New York Federal Reserve Bank.
Four of the remaining presidents of Federal Reserve Banks on a 1-year rotating basis
transactions demand for money
The demand for money as a medium of exchange
graphed as a vertical line
what determines transactions demand for money and why
nominal GDP because households and firms will want more money for transactions if prices or real output increase
asset demand for money
The amount of money people want to hold as a store of value
varies inversely with the interest rate
total demand for money
transactions demand for money + asset demand for money
downsloping line
what changes/shifts the total demand for money
a change in nominal GDP (through transactions demand)
bond interest yield or rate
fixed annual interest paid by the bond / bond price = interest yield or rate
percentage rate of return
(future price - initial price) / initial price
Security Market Line (SML)
A line that shows the average expected rate of return of all financial investments at each level of nondiversifiable risk measured by beta.
average expected rate of return
risk-free interest rate (if) + risk premium
what determines the SML’s slope?
investors’ feelings about risk and how much compensation they require for dealing with it
The more they dislike risk, the steeper it is b/c they expect more compensation for any increase in risk
what shifts SML?
Changes in the risk free rate (if)
Note
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