VCU ECON 203 - Money Market (2 pages)

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Money Market



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Money Market

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A more in-depth look at the effect of the reserve requirements as a tool of the Fed


Lecture number:
34
Pages:
2
Type:
Lecture Note
School:
Virginia Commonwealth University
Course:
Econ 203 - Introduction to Economics
Edition:
1

Unformatted text preview:

ECON 203 1nd Edition Lecture 34 Outline of Last Lecture I Movement of aggregate demand curve II Federal Reserve III Tools to change M by Fed Outline of Current Lecture I II Tools of the Fed Reserve Requirements Current Lecture I II Tools of the Fed a Discount rate b Open market transactions c Reserve requirements d 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 run i Lower discount rate ii Open market purchase of bonds iii Lower reserve requirements e 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 run i Increased discount rate ii Open market sale of bonds iii Increase reserve requirements Reserve Requirements a 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 public c Ex Say you find 1000 in currency M C D 1000 0 1000 You then deposit the 1000 M C D 0 1000 1000 At a RR of 10 the bank keeps 100 and lends out 900 M 900 1000 1900 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 900 is deposited by the loan acceptor M 0 1900 1900 The bank keeps 190 and lends 810 M 810 1900 2710 This 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 Fed



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