Econ 100b
ECONOMICS 100B Professor Steven Wood
10/18/11 Lecture 16
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LECTURE: ICLICKER QUESTIONS/ANSWERS: 1.) The Fed can reduce the money supply by reducing: the monetary base. 2.) The money supply would shrink by the greatest amount if the public increased their currency holding ratio and the banks increased their excess reserve ratio. 3.) If the Fed wanted to increase the money supply without using open market operations, it could try to get the public to decrease their currency holding ratio and decrease banks’ reserve requirements. 4.) Changes in reserve requirements directly and immediately affect: the money multiplier. 5.) If banks decided to increase their holdings of excess reserves, none of the above. MONEY SUPPLY PROCESS: The money supply process is based on changes in the Fed’s balance sheet, which consists of assets and liabilities. The Fed’s assets include government securities, which are acquired through open market operations, and discount loans to depository institutions (banks). Discount loans consist of banks’ borrowings from the Fed. The rate at which
banks borrow from the Fed is known as the discount rate. On the other hand, the Fed’s liabilities include currency in circulation, which is held by the nonbank public, and reserves, which consist of bank reserves deposited at the Fed and banks’ vault cash. Whenever banks borrow from the Fed, the Fed’s assets increase. Whenever banks make deposits at the Fed, the Fed’s liabilities increase, because it must pay back the banks whenever demanded. There are two types of reserves: 1.) Required reserves: the minimum amount of reserves banks must legally
10/18/11 Lecture 16
ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence.
These notes are copyrighted by the University of California and are for your personal use only.
LECTURE: ICLICKER QUESTIONS/ANSWERS: 1.) The Fed can reduce the money supply by reducing: the monetary base. 2.) The money supply would shrink by the greatest amount if the public increased their currency holding ratio and the banks increased their excess reserve ratio. 3.) If the Fed wanted to increase the money supply without using open market operations, it could try to get the public to decrease their currency holding ratio and decrease banks’ reserve requirements. 4.) Changes in reserve requirements directly and immediately affect: the money multiplier. 5.) If banks decided to increase their holdings of excess reserves, none of the above. MONEY SUPPLY PROCESS: The money supply process is based on changes in the Fed’s balance sheet, which consists of assets and liabilities. The Fed’s assets include government securities, which are acquired through open market operations, and discount loans to depository institutions (banks). Discount loans consist of banks’ borrowings from the Fed. The rate at which
banks borrow from the Fed is known as the discount rate. On the other hand, the Fed’s liabilities include currency in circulation, which is held by the nonbank public, and reserves, which consist of bank reserves deposited at the Fed and banks’ vault cash. Whenever banks borrow from the Fed, the Fed’s assets increase. Whenever banks make deposits at the Fed, the Fed’s liabilities increase, because it must pay back the banks whenever demanded. There are two types of reserves: 1.) Required reserves: the minimum amount of reserves banks must legally