ECON 1010 Lecture Notes - Lecture 8: Nominal Interest Rate, Open Market Operation, Bank Reserves
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BOC conducts open market operation in which it buys securities from banks.
BOC pays for securities with newly created bank reserves.
Banks have more reserves, same amount of deposits so they have excess.
Excess reserves = Actual reserves – desired reserves
The Money Multiplier
Is the ratio of the change in quantity of money to the change in the monetary base.
Quantity of money created depends on the desired reserve ratio and the currency drain ratio.
The Money Market
The Influences on Money Holding
The quantity of money that people plan to hold depends on four main factors:
• The price level
- Rise in the price level increases the quantity of nominal money but does not
change the quantity of real money people plan to hold.
- Nominal money is the amount of money measured in dollars.
- Real money = nominal money ÷ price level
• The nominal interest rate
- Is the opportunity cost of holding wealth in the form of money rather than an
- A rise in the nominal interest rate on other assets decreases the quantity of real
money that people plan to hold.
• Real GDP
- An increase in real GDP increases the volume of expenditure, which increases the
quantity of real money that people plan to hold.
• Financial innovation
- Financial innovation that lowers the cost of switching between money and
interest-bearing assets decreases the quantity of real money that people plan to
The Demand for Money
Is the relationship between the quantity of real money demanded and the nominal interest rate
when all other influences on the amount of money that people wish to hold remains the same.
Rise in the interest rate brings a decrease in the quantity of real money demanded.
Fall in the interest rate brings an increase in the quantity of real money demanded.
Shifts in the Demand for Money Curve
An increase in real GDP increases the demand for money and shifts the demand curve rightward.
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