Scenario #2
Thursday, April 13, 2017
Tuesday, April 11, 2017
Loanable Funds Market- 04/4/17
Loanable Funds Market- 04/4/17
Loanable Funds Market:
- Private sector supply and demand for loans
- Brings together savers and borrowers
- Shoes effect on Real interest Rate
Demand:
-inverse relationship between real interest rate and quantity of loans demanded
Supply:
-Direct relationship between real interest rate and quantity of loans supplied
-NOT SAME AS MONEY MARKET
The Tools of Monetary Policy and Shifters of MS- 04/03/17
The Tools of Monetary
Policy and Shifters of MS- 04/03/17
Tools of Monetary Policy:
1) Reserve Requirements
2) Open Market Operation
3) Discount Rate
Reserve Requirement:
1) Reserve Requirements
2) Open Market Operation
3) Discount Rate
Reserve Requirement:
-amount that
must be kept in vaults
-FED sets the percent banks must hold
-FED sets the percent banks must hold
1) If there is a recession, what should
FED do to the RRR?
Decrease the reserve ratio
-Banks hold less money and have more excess reserves
-Banks create more money by loaning out excess reserves
-MS increases, i decreases, AD increases
Decrease the reserve ratio
-Banks hold less money and have more excess reserves
-Banks create more money by loaning out excess reserves
-MS increases, i decreases, AD increases
2) If there is an inflation, what should
the FED do to the RRR?
Increase the reserve ratio
-Banks hold more money and have less ER
Increase the reserve ratio
-Banks hold more money and have less ER
-Banks create
less money
-MS decreases, i increases, AD decreases
-MS decreases, i increases, AD decreases
Open Market Operation:
-FED buys/sells bonds
-most important and widely used monetary tool
-If fed buys bonds, MS increases
-If FED sells bonds, MS decreases
-FED buys/sells bonds
-most important and widely used monetary tool
-If fed buys bonds, MS increases
-If FED sells bonds, MS decreases
Discount Rates
-interest rate that FED charges Commercial banks for short term loans
Federal Fund Rate:
-interest rate that banks charge one another of overnight loans
Prime Rate:
-interest rate banks charge their most credit worthy customers
-interest rate that FED charges Commercial banks for short term loans
Federal Fund Rate:
-interest rate that banks charge one another of overnight loans
Prime Rate:
-interest rate banks charge their most credit worthy customers
Money Creation- 03/27/17
Money Creation- 03/27/17
- A single bank
can create $ by the amount of its excess reserves
- The banking system as a whole can create money by a multiple of the excess reserves
- MM * ER = expansion of money
- MM = 1/RRR
- The banking system as a whole can create money by a multiple of the excess reserves
- MM * ER = expansion of money
- MM = 1/RRR
New vs. Existing Money
- If the initial deposit in a bank comes from the FED or bank purchase of a bond or other money of the initial deposit in a bank comes from the FED or 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
-The total change in MS if initial deposit is new money = Deposit + money created by banking system.
-If a deposit in a bank is existing money (already counted in M1, currency or checks) depositing the amount does NOT change the MS immediately because it is already counted in it
-Existing currecy deposited into a checking account changed only the composition of the money supply from coins/paper money to checking account deposits
- If the initial deposit in a bank comes from the FED or bank purchase of a bond or other money of the initial deposit in a bank comes from the FED or 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
-The total change in MS if initial deposit is new money = Deposit + money created by banking system.
-If a deposit in a bank is existing money (already counted in M1, currency or checks) depositing the amount does NOT change the MS immediately because it is already counted in it
-Existing currecy deposited into a checking account changed only the composition of the money supply from coins/paper money to checking account deposits
-
Total
change in MS in deposit is existing money = banking system created money only
Money Market- 03/23/17
Money
Market- 03/23/17
-Demand for money has an inverse relationship between
nominal interest rates and the quality of money demanded
1) What happens to the quantity demanded of the money when interest rates increase?
-Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities
2) What happens to the quantity demanded when interest rates decrease?
-Quantity demanded increase
-There is no incentive to convert cash into interest earning assets.
The Determinants for Money
1) Changes in price level
2) Changes in income
3) Changes in taxation that affects investment
Increasing the money supply
- increase money supply à Decreases interest rates à Increases investment à Increases AD
1) What happens to the quantity demanded of the money when interest rates increase?
-Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities
2) What happens to the quantity demanded when interest rates decrease?
-Quantity demanded increase
-There is no incentive to convert cash into interest earning assets.
The Determinants for Money
1) Changes in price level
2) Changes in income
3) Changes in taxation that affects investment
Increasing the money supply
- increase money supply à Decreases interest rates à Increases investment à Increases AD
Fractional Reserve System
- Demand deposits are created
- The process in which banks hold a small portion of their deposits in reserves and they loan out the excess
- Banks keep cash on hand (RR) to meet depositors needs
- Banks must keep reserve deposits in their vaults or at their district FED
- Total Reserves ( total funds held by the bank) equals to Required Reserves + Excess Reserves
- Banks can only lend out their excess reserves
Bonds vs. Stocks- 03/22/17
Bonds vs. Stocks- 03/22/17
Bonds:
-Loans or IOU’s that represent debt that the government or a corporation must repay to an investor
-The Bond holder has NO OWNERSHIP of the company
How are the values of bond determined?
-First, if a corporation issues then sells a bond, it’s liability for the corporation and asset for the buyer
-If nominal interest rate increases, bonds decrease
Stocks:
-Stock owners can profit in two ways
1) Dividends: portions of a corporation’s profits are paid out to stockholders
-As the profit increases, the dividend increases
2) Capital gain: earned when a stockholder sells stock for more than what he/she paid for it
-Capital loss: when a stockholder sells stock at a lower price than the purchase price
-Loans or IOU’s that represent debt that the government or a corporation must repay to an investor
-The Bond holder has NO OWNERSHIP of the company
How are the values of bond determined?
-First, if a corporation issues then sells a bond, it’s liability for the corporation and asset for the buyer
-If nominal interest rate increases, bonds decrease
Stocks:
-Stock owners can profit in two ways
1) Dividends: portions of a corporation’s profits are paid out to stockholders
-As the profit increases, the dividend increases
2) Capital gain: earned when a stockholder sells stock for more than what he/she paid for it
-Capital loss: when a stockholder sells stock at a lower price than the purchase price
Subscribe to:
Posts (Atom)