When a bank issues a new loan: Bank Assets: Everything the banks own and everything others owe the...
-
Upload
brendan-spencer -
Category
Documents
-
view
216 -
download
0
Transcript of When a bank issues a new loan: Bank Assets: Everything the banks own and everything others owe the...
When a bank issues a new loan:
Bank Assets:Everything the banks own and everything
others owe the banks.
Bank Liabilities:Everything the banks
owe others.
Vault cash 30Deposits at Fed 20Securities 60Loans 380Deposits 400Borrowing from Fed 10Required reserve ratio 10%
Assets Liabilities
RES
SEC 60LOANS
Vault Cash
30
DEP
BOR 10
Dep at Fed
The Banking System and the Federal Reserve Board
Required reserves =
Required reserve
ratio Deposits
Excessreserves = Actual
reserves Requiredreserves
LOANS and DEP increase by the amount of the new loan;RES are unaffected;Subsequent transactions change the composition of deposits, but not the overall level.
Key Questions to PoseWith actual reserves of _______ and a required reserve ratio of _______%, how many deposits can banks be liable for? _______
Since loans and deposits increase by the same amount when a bank issues a new loan and reserves are unaffected, how many ____________ loans can banks issue? _________
10500
50
more 90
= 10% = 40= 50 = 10
410
390
400 = 414041 = 9
400500
20
480
50
380
41050050 = 0
= 50
NB: When a bank has excess reserves, it can
issue more loans.
Lab 5.1
Because 10% 500 = 50Why 500?
Fed Uses Its “Tools” to Conduct Monetary Policy
Open market operationsDiscount rateRequired reserve ratio
The Fed purchases or sells Treasury bills (T-bills) that have been previously issued by the U.S. Treasury.
Assets Liabilities
RES 50
SEC 60
Vault Cash
30
BOR 10
Dep at Fed
20LOANS 480
DEP 500
Question: Which balance sheet entry counts as money? That is, which entry can we use to purchase goods and services?
Answer: Deposits. DEP
M1 = Cash + Checking Deposits
M2 = M1 + Savings Deposits
M
i (%)MSMS’ MS’
Contractionary ExpansionaryMonetary
Policy
Contractionary
DEP decreases
MS curve shifts left
Expansionary
DEP increases
MS curve shifts right
Roles of the Federal Reserve BoardFed Monitors Banks
Fed Acts as the Bank’s Bank
Question: Which item on the balance sheet is part of the money supply? DEP
T-Bill
Federal Reserve BoardWashington, DC
Pay to the order of Kate$5Janet Yellen
Fed
Kate’s Bank
Open Market Operation: Purchase of $5
Kate
Assets Liabilities
RES
SEC 60
LOANS
Vault Cash
30
DEP
BOR 10
Dep at Fed
505 500550
2025
480
5055
525
With actual reserves of _______ and a required reserve ratio of _______%, how many deposits can banks be liable for? _______
10
550
55
Since loans and deposits increase by the same amount when a bank issues a new loan and reserves are unaffected, how many ____________ loans should banks issue? _________
more45
Required reserves =
Required reserve
ratio Deposits
= 10% = 50500550 = 55
Kate’s deposits at his bank increase by $5.
Bank’s deposits at its bank, the Fed, increase by $5.
M
i (%)MS’MS
500 550
MD
5.0
3.8
Open Market Operation: Purchase of $5
Bank deposits increase by 50 from 500 to 550
Money supply (MS)
curve shifts right
Nominal interest rate
falls
Assets Liabilities
RES 50
SEC 60
Vault Cash
30
BOR 10
Dep at Fed
20LOANS 480
DEP 50055
25
525
550
Lab 5.2
T-Bill
KateAmherst, MA
Pay to the order of the Fed$5Kate
Fed
Kate’s Bank
Open Market Operation: Sale of $5
Kate
Assets Liabilities
RES
SEC 60
LOANS
Vault Cash
30
DEP
BOR 10
Dep at Fed
495 500450
2015
480
5045
435
With actual reserves of _______ and a required reserve ratio of _______%, how many deposits can banks be liable for? _______
10
450
45
Since loans and deposits increase by the same amount when a bank issues a new loan and reserves are unaffected, how many ____________ loans should banks issue? _________
fewer45
Required reserves =
Required reserve
ratio Deposits
= 10% = 50500450 = 45
Macro Lab 5.2: Open Market Purchase
Kate’s deposits at her bank decrease by $5.
Bank’s deposits at its bank, the Fed,
decrease by $5.
M
i (%)MS’ MS
500450
MD
5.0
6.3
Open Market Operation: Sale of $5
Bank deposits decrease by 50 from 500 to 450
Money supply (MS)
curve shifts left
Nominal interest rate
rises
Assets Liabilities
RES 50
SEC 60
Vault Cash
30
BOR 10
Dep at Fed
20LOANS 480
DEP 50045
15
435
450
Lab 5.3
The Federal Reserve Board and the Taylor Principle
IS Question: What would GDP equal if the real interest rate were _____ percent, given that all other relevant factors remained the same?
r (%)
GDP
IS
When the inflation rate () increases the Fed “slows down” the economy by increasing the real interest rate (r).
When the inflation rate () decreases the Fed “speeds up” the economy by decreasing the real interest rate (r).
Inflation rate () increases
Real interest rate (r) increases
GDP decreases
Fewer goods and services are produced
Economy “slows down”
Inflation rate () decreases
Real interest rate (r) decreases
GDP increases
More goods and services are produced
Economy “speeds up”
Taylor principle
IS curve is downward sloping
Economy stabilizes
Taylor Principle
Fed’s Goal: Stabilize the economy
The Taylor Principle and the Monetary Policy (MP) CurveMP Question: What would the real interest rate (r) equal, if the inflation rate () were _____ percent?
r (%)
(%)
MP
When the inflation rate () increases the Fed “slows down” the economy by increasing the real interest rate (r).When the inflation rate () decreases the Fed “speeds up” the economy by decreasing the real interest rate (r).
Inflation rate () increases
Real interest rate (r) increases
GDP decreases
Fewer goods and services are produced
Economy “slows down”
Inflation rate () decreases
Real interest rate (r) decreases
GDP increases
More goods and services are produced
Economy “speeds up”
Taylor principle
IS curve is downward sloping
Economy stabilizes
The monetary policy (MP) curve formalizes the Taylor principle.
Claim: MP curve is upward sloping
The positive slope of the MP curve captures the Taylor principle.
Autonomous Monetary Policies and the Monetary Policy (MP) Curve
MP Question: What would the real interest rate (r) equal, if the inflation rate () were _____ percent?
r (%)
(%)
Autonomous contractionary monetary policy increases the intercept. The monetary policy curve shifts up; consequently, the Fed becomes “tougher” on inflation. The Fed responds to a given rate of inflation with a larger increase in the real interest rate.
Autonomous expansionary monetary policy decreases the intercept. The monetary policy curve shifts down; consequently, the Fed becomes “easier” on inflation. The Fed responds to a given rate of inflation with a smaller increase in the real interest rate.
MP
MP’
MP’
The Monetary Policy (MP) Curve: A Summary
The Fed’s application of the Taylor principle causes the monetary policy (MP) curve to be upward sloping.
The autonomous monetary policies pursued by the Fed shifts the entire monetary policy (MP) curve.