ECON 203 1nd Edition Lecture 34Outline of Last Lecture I. Movement of aggregate demand curveII. Federal ReserveIII. Tools to change M by FedOutline of Current LectureI. Tools of the FedII. Reserve RequirementsCurrent LectureI. Tools of the Feda. Discount rateb. Open market transactionsc. Reserve requirementsd. Things that cause money to raise and cause Price and Quantity to rise in the short run, Price to rise further and Quantity to return to Q* in the long runi. Lower discount rateii. Open market purchase of bondsiii. Lower reserve requirementse. Things that cause money to fall and cause Price and Quantity to fall in the short run, Price to fall further and Quantity to return to Q* in the long runi. Increased discount rateii. Open market sale of bondsiii. Increase reserve requirements II. Reserve Requirementsa. A fraction of each dollar deposited, banks must keep around (not lend). Typically the RR is 10%. Banks ‘create’ money through the act of lending out money that they realistically do not have. b. Money supply (M)= currency (C) + deposits (D) Money supply is money in the hands of the non-bank publicc. Ex.) Say you find $1000 in currency. M=C+D=1000+0=1000You then deposit the $1000. M=C+D= 0 + 1000= 1000At a RR of 10%, the bank keeps $100 and lends out $900. M= 900 + 1000 = 1900These 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.$900 is deposited by the loan acceptor. M = 0 + 1900 = 1900The bank keeps $190 and lends $810. M = 810 + 1900 = 2710This keeps going until the bank has lent out everything it possibly can. It then has$1000 in reserves and $10,000 lent out. M= 10,000 This is how a bank can grow money. Raising RR will decrease M *economists claim the RR is the most powerful tool of the
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