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EC223 Lecture Notes - Lecture 23: Open Market Operation, Monetary Base, Bell System

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School
WLU
Department
Economics
Course
EC223
Professor
Wendy Wu

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Document Summary

Nonconventional monetary policy tools during the global financial crisis (chapter 16 pgs. Three players in the money supply process *question on the exam* The central bank: government agency that oversees the banking system and is responsible for the conduct of monetary policy. Banks (depository institutions: financial intermediaries that accept deposits from individuals and institutions and make loans. Individuals and institutions that hold deposits in banks. Liabilities: currency in circulation: in the hands of the public, reserves: deposits (settlement balances) at the bank of canada and vault cash *these are particularly important for our analysis* Assets: government securities: holdings by the bank of canada that affect money supply and earn interest, loans to financial institutions: provide loans (advances) to banks and charge the bank rate. Banks (lvts participants), have an account at the bank of canada in which they hold deposits (also called settlement balances) Reserves consist of settlement balances at the bank of canada plus vault cash.

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Related Questions

1. You’ve learned about money, its connection to inflation, money supply and the monetary multiplier, banking and money creation. Try to apply your understanding of these concepts in analyzing our current situation: During the crisis and until now, the Fed bought a lot of securities from banks and other financial institutions. This made some people fear that the Fed’s actions would spark inflation. Yet, inflation hasn’t really shown up in our economy (and the Fed has been doing this for five years now). Explain why, by answering the following questions:

a. Discuss briefly the connection between money supply and inflation.

b. When the Fed buys securities in the open market, what happens to banks’ reserves? What tends to happen to money supply, as a consequence? Explain briefly your answer to the last question. Let’s now look at the facts (data). FRED (Links to an external site.)is a good source of economic data, especially about money. Click on the “popular series” tab in the FRED homepage.

c. Look at the “CPI for all urban consumers” series first. Remember that inflation is the rate of increase in CPI. Eyeballing the graph, would you say that the CPI accelerated since 2008 or not?

d. Next, look at the “M2 money stock” series (make sure that you’re still in the “popular series” page). Has M2 increased faster since 2008?

e. Let’s try to understand why M2 is showing the pattern that it is. What might be the explanation for it? To see facts about the answer, type “excess reserves of depository institutions” in the FRED searchbox, and briefly discuss the pattern you see for this series, starting around 2008.

f. Look at the “Velocity of M2” series. What happened to it since 2008? Does this pattern support the idea that inflation should rise, or not? Explain briefly. [If you forgot what “velocity of money” means, please review the “Chapter 17 Highlights” and focus on the Equation of Exchange.