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111 Cards in this Set
- Front
- Back
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Who are the three players in the money supply process?
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"1. The Central Bank 2. Banks (depository instit.) 3. Depositors"
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What are the 2 liabilities on the Fed's balance sheet?
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"1. Currency in circulation
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What are the two assets on the Fed's balance sheet?
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"1. Government Securities 2. Discount Loans"
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What is the Monetary Base?
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Fed's Liabilities + Treasury Liabilities
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What comprises Reserves?
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Bank deposits at the Fed + Vault Cash
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What is the discount rate?
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The interest rate the Fed charges banks on loans to meet reserves.
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Express the monetary base mathematically
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What is another name for the monetary base?
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High Powered Money
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What is the Fed's purchase of bonds called?
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an Open Market Purchase
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What is the Fed's sale of bond's called?
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An Open Market Sale
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What happens to to RESERVES if the proceeds of an open market purchase are kept in currency?
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No effect on reserves
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What happens to to RESERVES if the proceeds of an open market purchase are kept in deposits?
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Reserves increase by the amount of the open market purchase.
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What is the effect of an open market purchase on the MONETARY BASE?
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"The Monetary Base is increased by the amount of the open market purchase, regardless of whether it's held in cash or deposits."
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How is the Monetary Base affected by an open market sale?
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The monetary base decreases by the amount of the sale.
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"On which is the effect of open market operations more certain, monetary base or reserves?"
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The effect of open market operations on the monetary base is much more certain.
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"How is the Monetary Base affected if there is a shift from deposits to currency, but the fed has NOT conducted open market operations?"
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NO EFFECT. Only RESERVES are affected.
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What is float?
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the temporary net increase in total reserves from the Fed's check-clearing process.
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What is the nonborrowed monetary base?
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"Where MBn = nonborrowed monetary base MB = monetary base BR = borrowed reserves from the fed."
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What is multiple deposit creation?
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"When the fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount."
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When can a bank safely loan an amount greater than its excess reserves?
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Never
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"How is deposit expansion affected when a bank uses it's excess reserves to i) make a loan? ii) to purchase a stock?"
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The effect on deposit expansion is the same in either case.
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Explain how a single bank can generate multiple deposit expansion
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Not possible! Only the banking system as a whole can do this.
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What is the formula for the Simple Deposit Multiplier?
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When is the banking system in equilibrium?
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when
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Is the MBn's relationship to the money supply positive or negative?
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The MBn is positively related to the money supply.
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Are Borrowed Reserves' relationship to the money supply positive or negative?
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Borrowed Reserves are positively related to the money supply
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Is the Required Reserve Ratio's relationship to the money supply positive or negative?
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The Required Reserve Ratio is NEGATIVELY related to the money supply.
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Is the money supply's relationship to currency holdings positive or negative?
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Currency Holdings are negatively related to the money supply.
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Is the money supply's relationship to excess reserves positive or negative?
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Excess Reserves are negatively related to the money supply.
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A
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B
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Who are the three players in the money supply process?
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1. The Central Bank 2. Banks (depository instit.) 3. Depositors
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What are the 2 liabilities on the Fed's balance sheet?
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1. Currency in circulation 2. Reserves
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What are the two assets on the Fed's balance sheet?
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1. Government Securities 2. Discount Loans
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What is the Monetary Base?
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Fed's Liabilities + Treasury Liabilities
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What comprises Reserves?
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Bank deposits at the Fed + Vault Cash
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What is the discount rate?
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The interest rate the Fed charges banks on loans to meet reserves.
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Express the monetary base mathematically
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What is another name for the monetary base?
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High Powered Money
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What is the Fed's purchase of bonds called?
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an Open Market Purchase
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What is the Fed's sale of bond's called?
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An Open Market Sale
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What happens to to RESERVES if the proceeds of an open market purchase are kept in currency?
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No effect on reserves
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What happens to to RESERVES if the proceeds of an open market purchase are kept in deposits?
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Reserves increase by the amount of the open market purchase.
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What is the effect of an open market purchase on the MONETARY BASE?
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The Monetary Base is increased by the amount of the open market purchase, regardless of whether it's held in cash or deposits.
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How is the Monetary Base affected by an open market sale?
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The monetary base decreases by the amount of the sale.
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On which is the effect of open market operations more certain, monetary base or reserves?
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The effect of open market operations on the monetary base is much more certain.
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How is the Monetary Base affected if there is a shift from deposits to currency, but the fed has NOT conducted open market operations?
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NO EFFECT. Only RESERVES are affected.
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What is float?
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the temporary net increase in total reserves from the Fed's check-clearing process.
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What is the nonborrowed monetary base?
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Where MBn = nonborrowed monetary base MB = monetary base BR = borrowed reserves from the fed.
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What is multiple deposit creation?
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When the fed supplies the banking system with $1 of additional reserves, deposits increase by a multiple of this amount.
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When can a bank safely loan an amount greater than its excess reserves?
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Never
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How is deposit expansion affected when a bank uses it's excess reserves to i) make a loan? ii) to purchase a stock?
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The effect on deposit expansion is the same in either case.
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Explain how a single bank can generate multiple deposit expansion
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Not possible! Only the banking system as a whole can do this.
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What is the formula for the Simple Deposit Multiplier?
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When is the banking system in equilibrium?
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The MBn is positively related to the money supply.
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Are Borrowed Reserves' relationship to the money supply positive or negative?
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Borrowed Reserves are positively related to the money supply
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Is the Required Reserve Ratio's relationship to the money supply positive or negative?
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The Required Reserve Ratio is NEGATIVELY related to the money supply.
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Is the money supply's relationship to currency holdings positive or negative?
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Currency Holdings are negatively related to the money supply.
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Is the money supply's relationship to excess reserves positive or negative?
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Excess Reserves are negatively related to the money supply.
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What is the Federal Funds Rate
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The rate on overnight loans of reserves between banks
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Equilibrium in the Market for Reserves
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On what does the effect of an Open Market Operation depend?
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Whether the supply curve initially intersects the demand curve in it's downward-sloped section vs. it's flat section.
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When there is an open market purchase, the fed funds rate _____
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falls
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When there is an open market sale, the fed funds rate _____
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rises
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What does the interest rate paid on reserves do for the federal funds rate?
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It sets a floor for the fed funds rate.
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What is the effect most changes in the discount rate have on the fed funds rate?
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Most changes have no effect on fed funds rate.
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What happens to the fed funds rate when the fed raises reserve requirements?
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Fed funds rate rises
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What happens to the fed funds rate when the fed decreases reserve requirements
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Fed funds rate falls
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What is the purpose of Dynamic open market operations?
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To change the level of reserves and the monetary base
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What is the purpose of Defensive open market operations?
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To offset movements in other factors that affects reserves and the monetary base, e.g. changes in Treasury deposits with Fed changes in float
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What is "repo" a nickname for?
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Repurchase agreement.
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What is a matched sale-purchase transaction?
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Fed sells securities and the buyer agrees to sell them back to the Fed in the near future.
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What are 4 advantages of open market operations?
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1. Fed initiates them 2. They're flexible & precise 3. They're easily reversed 4. They're quickly implemented
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What is the discount window?
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The facility at which banks can borrow reserves from the Fed.
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What is the purpose of the discount window?
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It's intended to be a backup source of liquidity for sound banks so the fend funds rate stays near the fed funds target.
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Who sets the fed funds target rate?
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the Federal Open Market Committee
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What is the most important advantage of discount policy?
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The Fed can use it to perform its role of Lender of Last Resort.
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What is the volume of discount loans (borrowed reserves) affected by?
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The discount rate
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True or False: Changing reserve requirements is precise and often used policy tool for controlling the money supply.
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False. It is a blunt tool and is no longer used as a policy tool.
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What is the advantage of Monetary targeting?
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it's possible to know, almost immediately, if the central bank is achieving its target.
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What is the disadvantage of Monetary Targeting?
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It only works well when the monetary aggregate and inflation's relationship is reliable...unlike your last relationship.
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What are the advantages of inflation targeting?
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1. Enables focus on domestic considerations 2. stable relationship b/w money and inflation not critical to success 3. Easily understood, transparent. 4. increase central bank's accountability 5. ameliorate inflation shocks
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What are the disadvantages of inflation targeting?
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1. Inflation not easily controlled, and thus inflation targets do not send immediate signals. 2. might impose a rigid rule on policymakers 3. focusing on inflation may lead to larger output fluctuations
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What are the advantages of the Fed using an implicit nominal anchor?
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1. Lacks transparency 2. Highly subject to human error 3. Some inconsistencies with democratic principles
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Why must the Fed choose between interest-rate or aggregate policy instruments?
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Because these instruments are incompatible with each other.
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What are the three criteria the fed uses to choose between interest-rate and aggregate policy instruments?
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1. Measurability 2. Controlallability 3. Predictability of effects on goal variables.
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What does the Taylor Rule indicate?
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The federal funds rate should be set = to the inflation rate + an "equilibrium" real funds rate plus a weighted average of two gaps: 1. Inflation gap 2. Output gap
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How do you find the inflation gap?
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Current inflation minus a target rate
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How do you find the output gap?
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the percentage deviation of real GDP from an estimate of its estimated full employment potential
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True or False: High output relative to potential, as measured by by low unemployment, produces higher inflation.
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Controversial. Was thought to be true, but in recent years has not proven true.
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What are the two types of bubbles?
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1. Credit-driven bubbles 2. Asset bubbles (bubbles driven by irrational exuberance)
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Which kind of bubble warrants a response from central banks?
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Credit-driven bubbles
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True or false: The Fed has kept a consistent operating target throughout its history.
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False. History reveals that the Fed has switched its operating targets many times.
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What is the NAIRU?
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the Nonaccelerating Inflation Rate of Unemployment
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What is the Phillips curve theory?
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States that changes in inflation are influenced by the state of the economy relative to its productive capacity, as well as by other factors.
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What is a policy instrument?
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a variable that responds to the central bank's tools and indicates the stance of monetary policy.
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Give 2 examples of an intermediate target?
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1. Monetary aggregates, like M2 2. Long-term interest rate
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What is the exchange rate?
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The price of one currency in terms of another.
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What is the foreign exchange market?
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the financial market where exchange rates are determined
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What are the two kinds of exchange rate transactions?
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1. Spot transactions 2. Forward transactions
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What is a spot transaction?
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transactions involving the immediate (two-day) exchange of bank deposits
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What is a Forward transaction?
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A transaction that involves the exchange of bank deposits of some future specified date.
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What is the spot exchange rate?
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The exchange rate for a spot transaction.
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What is the forward exchange rate?
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The exchange rate for a forward transaction.
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What happens when a county's currency appreciates?
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The country's goods abroad become more expensive and foreign goods in that country become cheaper
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What happens when a country's currency depreciates?
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it's goods abroad become cheaper and foreign goods in that country become more expensive.
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What is the Law of One Price?
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If two countries produce a good, and transaction costs and trade barriers are very low, the price of the good should be the same throughout the world, regardless of producer.
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What is Purchasing Power Parity?
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Exchange rates between any two countries will adjust to reflect changes in the price levels of the two countries.
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What happens when a factor increases the demand for domestic goods relative to foreign goods?
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The domestic currency will appreciate.
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What happens when a factor decreases the demand for domestic goods relative to foreign goods?
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The domestic currency will depreciate.
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What does a rise in a country's price level cause in the long run?
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Currency depreciation.
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What does a fall in a country's price level cause in the long run?
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Currency appreciation.
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