UW-Madison ECON 102 - Chapter 14: Open Market Operations, Sales, and Purchases (4 pages)

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Chapter 14: Open Market Operations, Sales, and Purchases



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Chapter 14: Open Market Operations, Sales, and Purchases

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Chapter 14, Open Market Operations, Sales, and Purchases, federal funds rate, discount rate


Lecture number:
19
Pages:
4
Type:
Lecture Note
School:
University of Wisconsin, Madison
Course:
Econ 102 - Principles of Macroeconomics
Edition:
1
Documents in this Packet
Unformatted text preview:

Econ 102 1st Edition Lecture 19 Outline of Last Lecture I In Plain English Federal Reserve Outline of Current Lecture I Chapter 14 Current Lecture I Chapter 14 a Principle of Opportunity cost i Rates vs Money Demand 1 moves up and to the left ii 3 reasons for Md 1 Transactions Demand a depends on GDP P 2 Liquidity Demand a future transactions b ex december graduates saving for january rent 3 Speculative Demand a changes in risk iii Holding 1 2 3 constant Md increases if and only if r decreases b Changes in bank behavior affect both interest rates and the money supply These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute i The money multiplier increases if the reserve ratio falls banks make more loans hold less in reserve 1 Money supply shifts right at any interest rate 2 Money supply Money demand at the initial interest rate Money demand will only rise if the opportunity cost of holding money falls 3 If the banks are lending more someone is borrowing more a only way is if the cost of the loan is LOWER b price interest rate is lower ii The money multiplier decreases if the reserve ratio rises banks make fewer loans hold more in reserve 1 Money supply shifts left and interest rates increase loans are more scarce so they are also more expensive 2 cost is going to go up 3 more expensive loans higher interest rates iii open market operations 1 The purchase or sale by the Fed of short term U S government securities on the secondary bond market 2 The federal reserve bank IS NOT directly buying bonds a it is illegal for them to directly lend to the US government iv open market purchases 1 The Fed s purchase of short term government 2 bonds from the private sector on the secondary bond market 3 the total amount of US government borrowing is unaffected by monetary policy 4 they can do anything they want on SECONDARY markets v open market sales 1 The Fed s sale of short term government bonds to the private sector on the secondary bond market vi federal funds market 1 The market in which banks borrow and lend reserves to and from one another Also known as the interbank lending market 2 overnight or two days very short term 3 inflation therefore doesn t matter vii federal funds rate 1 The interest rate on reserves that banks lend each other The federal funds rate is a very short term risk free and inflation free interest rate viii Note there is nothing federal about the federal funds market 1 It is a private market with private trades between banks It was 2 Highly regulated hence federal until 1980 and the name stuck 3 Don t set the market just influence a although because US has always hit the mark it feels like they re setting it ix If the Fed wishes to increase the supply of money it can reduce banks reserve requirements so they have more money to loan out x Open Market Operations are the primary Fed policy tool but there are two other tools at their disposal that are frequently used in some other countries 1 discount rate a The interest rate at which banks can borrow from the Fed b During a recession its a risky time banks dont want to lend because they re afraid they wont be paid back If they have more reserves excess reserves they wont lend them Therefore interest rates dont fall and Aggregate demand doesn t go up c I m not playing with the money because I ll lose it d Reserves build up dramatically i pushing on a string cant use the policy ii you cant make the banks lend iii CAN however PULL aggregate demand iv Asymmetric works better to reduce aggregate demand then to increase it


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