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Macro 14.pdf
- 4. Quiz Master
- 5. Chapter 15 The Federal Reserve and Open Market Operations Central Banks Money Supplies Fractional Reserve Banking Reserve Ratio - Money Multiplier Monetary Tools Systemic Risks Control AD-AS Model
- 13. Fiat Money Government declared An arbitrary order No guarantee
- 14. Central Banks
- 17. AD Real GDP Growth Rate In fl ation Rate π LRAS SRAS Recession In fl ation
- 18. Reserve Ratio Fractional Reserve Banking Money Multiplier
- 21. Reserve Ratio Fraction of deposits that must be held in reserve
- 22. Money Multiplies as it is spent and re-spent and re-spent again and again… RR = 1÷ MM Money Multiplier MM = 1÷ RR
- 23. Reserve Ratio RR = 1÷ MM Money Multiplier MM = 1÷ RR
- 24. Reserve Ratio Money Multipler 100% 1 50% 2 20% 5 10% 10 5% 20 1% 100
- 25. Discount Rate Rate the FED charges member banks
- 26. Discount Rate Currently 0.25% Average 4.45% (1950 - 2021)
- 28. 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 Time to Maturity Interest Rate FED Changes Discount Rate Other Rates Follow
- 29. Open Market Operations Buying and Selling Financial Instruments
- 31. Banks now have more cash to loan Central Bank Public Banks Increase Money Supply? Buy bonds for cash
- 32. Banks now have less cash to loan Central Bank Public Banks Decrease Money Supply? Sell bonds for cash
- 33. What do banks do with extra money? Excess Reserves The FED will pay them interest
- 34. Excess Reserves Interest If the rate is high enough you will leave it in the bank. Sets a fl oor
- 35. Problem Recession Shift AD to Right In fl ation Shift AD to Left Tools Increase Money Supply Decrease Money Supply Reserve Ratio Lower Raise Discount Rate Lower Raise Open Market Operations Buy Bonds from the Banks Sell Bonds to the Banks Excess Reserves Interest Rate Lower Raise
- 36. Quantity of Reserves FED Reserve Interest Rate % Supply FED Rate 5% 7% 3% 10 15 5
- 37. Disin fl ation Slower growth in in fl ation rate 8% to 3% De fl ation Negative in fl ation 8% to -3%
- 38. Illiquid No cash Net worth to pay debt, but can’t sell quick and without loss Insolvent No cash No net worth to pay debt
- 40. Quantitive Easing Buying lots of other fi nancial instruments. Lots of illiquid assets
- 42. Quiz 1.What are the four monetary tools? 2. How do you use the tools if the problem is in fl ation? 3. How do you use the tools if the problem is unemployment? 4. How do you use the tools if the problem is stag fl ation?
- 43. Problem Money Supply AD Shift Reserve Ratio Discount Rate Open Market Operations Excess Reserve Rate In fl ation Unemployment Stag fl ation Left Increase Increase Sell Bonds Increase Right Decrease Decrease Decrease Buy Bonds Increase Decrease