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Monetary Policy and Open Market Operations
Monetary Policy and Open Market Operations
1000
2
= 1000 100
500
100
= 5%.
(in
real terms)
1200
2
= 1000 100
400
100
= 4%.
Thus, increasing the money supply from 1,000 to 1,200 causes the
equilibrium interest rate to fall.
= 1000 100 7
= .
$
+
or =
$$
$
or =
$
$
$
1+
$1000
1+0.111
$1000
1+0.01
= $990.
= $900.
$1210
(1+0.10)2
= $1,000
The $1,210 you would receive two years from now has a present
value of$1,000.
$
+
(i) The higher the interest rate, the lower the present value of a
future payment; the lower the interest rate, the higher the present
value of a future payment: $ and $ .
(ii) The longer an investor has to wait to receive a payment, the less
value it will have for him or her: $ .
$ =
$ =
$1,000,000
(1+.)
$1,000,000
(1+.)
=
=
$1,000,000
$385,543 and $ =
= $148,644
(1+.)
$1,000,000
$92,296 and $ =
= $295,303
(1+.)
$60
(1+)
$60
(1+)2
$60
+
(1+)3
$60
(1+)4
$60
+
(1+)5
$1,000
(1+)5
(1+)
+
(1+)2
(1+)3
+ +
(1+)
$
(1+)
$$
=
100
$
1000961.54
=
100
961.54
= 4%
$
(1+)
$1,000
(1+0.5)
= $952.38
$1000
Liabilities
Currency held by
nonbank public
Vault cash held
by banks
Reserve deposits
Total liabilities
$700
$100
$200
$1000
Currency issued by the central bank (the Fed) and held either by
the nonbank public or in vaults of private-sector banks is a debt
obligation of the Fed.
Liabilities
$100
Deposits
$3000
Total liabilities
$3000
$2700
Total assets
$3000
Banks keep as reserves some of the funds (or deposits) they receive.
Reserves are held partly in cash and partly in an account the banks
have at the central bank:
reserves by a bank
= cash in its vault + its reserves at the central bank
= $100 + $200 = $300.
Bank Reserves
Banks hold reserves for three reasons:
(i) Meet some depositors demand for withdrawal
(ii) Meet the demand for checks
(iii) Satisfy reserve requirements by law
Reserve requirements: reserve requirement set by the central bank
that banks must hold reserves in some proportion of their checkable
deposits
Bank Reserves
Reserve ratio or reserve-deposit ratio
()
=
()
bank reserves ()
=
bank checkable deposits ()
$
=
= . ( )
$
Liabilities
Securities (bonds)
$700
Gold
$100
$100
Reserve deposits
$200 + $100
= $300
$1100
Total assets
$1100
Total liabilities
$200 + $100
= $300
$2700
$3100
Liabilities
Deposits
Total liabilities
Excess reserves
= reserves ($100 + $300) required reserves
= $400 - $310 (=$3100*0.1) = $90
$3000 + $100
= $3100
$3100
$300
Loans
$2700 + $90
= $2790
$3190
Total assets
Liabilities
Deposits
Total liabilities
$3100 + $90
= $3,190
$3190
Excess reserves
= reserves ($100 + $300) required reserves ($3190 x 0.10)
= $400 - $319 = $81
Total liabilities
$3000 + $1000
= $4000
$4000
Excess reserves
= reserves ($100 + $300) required reserves ($4000 x 0.1)
= $400 - $400 = $0
=
(1
)
$100()
=0
1
1 1
For example, =
1
0.1
$100 = $1,000.