Module 26 and a bit of 27.notebook
March 16, 2016
Warm Up
1) You buy a 20­year bond for $1,000 with an interest rate of 5%. After 17 years, you decide to sell the bond, but interest rates have dropped to 3%. What is the present value of your bond?
2) If the Reserve Requirement is 5%
A. What is the money multiplier?
B. If $500 is deposited into the bank, what is the maximum amount that demand deposits will change by? What is the max. money supply change?
C. If $400 is withdrawn from the bank, what is the maximum amount that demand deposits will change by? What is the max. money supply change?
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
Banks T­Account
March 16, 2016
Common Questions:
1) What is the required reserve ratio?
2) What is the money multiplier?
3) What value of loans can this bank make right now?
Assets
• Loans ______
• Excess Reserves _____
• Required Reserves____
Liabilities
Demand deposits ______
Module 26 and a bit of 27.notebook
March 16, 2016
Common Questions:
Banks T­Account
If someone deposits 10,000 into the bank:
1) Before any new loans take place, what is the initial change in the money supply?
2) After the deposit, change all the values in the t­account. 3) What is the maximum amount the money supply can change by? The maximum amount demand deposits will change? Assets
• Loans ______
• Excess Reserves _____
• Required Reserves____
Liabilities
Demand deposits ______
Module 26 and a bit of 27.notebook
Banks T­Account
March 16, 2016
Common Questions:
If someone withdraws 10,000 from the bank:
1) What will this bank have to do?
2) How can the bank borrow money?
3) How much money does it need to borrow? Assets
• Loans ______
• Excess Reserves _____
• Required Reserves____
Liabilities
Demand deposits ______
Module 26 and a bit of 27.notebook
Banks T­Account
March 16, 2016
Common Questions:
1) What is the required reserve ratio?
2) What value of new loans can this bank lend out right now?
3) If the lend out all of their excess reserves, what is the maximum change in the money supply?
Assets
• Loans ______
• Excess Reserves _____
• Required Reserves____
Liabilities
Demand deposits ______
Module 26 and a bit of 27.notebook
Banks T­Account
March 16, 2016
Common Questions:
1) What happens to the money supply if the federal reserve bank buys the government bonds from this bank?
Initially? At the maximum?
Assets
• Loans ______
• Excess Reserves _____
• Required Reserves____
• Government Bonds ____
Liabilities
Demand deposits ______
Module 26 and a bit of 27.notebook
March 16, 2016
The FED Buys and Sells bonds from a bank.
•
•
•
•
When the FED buys bonds from a bank, the bank gets cash. That cash goes into their excess reserves.
They are not required to reserve any of it. The multiplier starts with that initial value.
Example: The required reserve ratio is 10%.
The FED buys 20,000 worth of bonds from a commercial bank. What is the maximum change to the money supply?
vs.
Someone deposits $20,000 into a commercial bank. What is the maximum change to the money supply?
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 Module 26:
The structure and purpose of the Federal reserve bank, my version.
Module 26 and a bit of 27.notebook
Module 26, My Version
*Started in 1913
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
/ Senate approved
14 year terms
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
(FOMC) 12 total members
/ always the NY pres.
Module 26 and a bit of 27.notebook
March 16, 2016
A bit of Module 27
3 tools of the Federal Reserve Bank (FED)
1) Reserve Requirements
2) Discount Rate
3) Open Market Operations
Module 26 and a bit of 27.notebook
March 16, 2016
1) Reserve Requirements
Changes Money Supply by requiring more or less % of bank deposits to be held in reserves.
• Every 2 weeks, a bank must meet the required reserve %.
• Typically, if a bank does not meet their required reserves, it will borrow money from other banks through the Federal Funds Rate. A bank can also borrow money from the fed through the Discount Rate.
Module 26 and a bit of 27.notebook
March 16, 2016
2) Discount Rate
If banks do not meet their required reserves, they can also borrow from the FED through the Discount Rate.
Typically set 1% higher than the Federal Funds Rate
Alters Money Supply:
DR, cost to banks who are short of reserves decreases. Banks Increase Lending
Money Supply
Module 26 and a bit of 27.notebook
3) Open Market Operations
• Buy and Sell Bonds (usually from comercial banks)
• Typically U.S. Treasury Bills (short term bonds)
• NEVER buys T­bills directly from U.S. government
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
Module 26 and a bit of 27.notebook
March 16, 2016
The Federal Reserve Bank: Monetary Policy
Recession
B, B, B
1) Below Current
1) Reserve Requirement
2) DR Below current
2) Discount Rate
3) Buy Bonds 3) Open Market Opeations
Inflation
1) Above Current
1) Reserve Requirement
2) DR above FFR
2) Discount Rate
3) Sell Bonds 3) Open Market Opeations
Module 26 and a bit of 27.notebook
March 16, 2016
Homework:
Read and take notes for Module 27; Answer questions