ECON 101 Lecture Notes - Lecture 4: Quantitative Easing, Savings Account, Reserve Requirement
Economics 101
Lori Leachman
Part 4 • Lecture
• Bank and Fed balance sheet
o Private bank
▪ Assets
• Cash
o Legal reserves
• Deposits with the fed *integrates with fed
o Bank discretion with required reserves
o Legal reserves
• Bonds/assets *integrates with fed
o Open market operations
• loans
▪ Liabilities
• Demand deposits
• Saving accounts
• Other bank account loans from other banks
o Fed
▪ Assets
• Bonds *integrates with private bank
o Open market operations
• gold/silver
• Foreign currency
• Mortgage backed securities (quantitative easing)
▪ Liabilities
• Currency
• Circulation
• Treasury accounts: transaction accounts of federal/state/local government
• Bank accounts: bank deposits with fed *integrates with private banks
o Bank discretion with required reserves
• Money creation
o Money multiplier = 1 / reserve requirement
▪ If reserve requirement is 10%, money multiplier is 1 / 0.1 = 10
▪ Maximum money supply is = initial loan * money multiplier
• If initial loan is 1000, then max MS = 1000 * 10 = 10,000
• Additional (new) money supply = 900 * 10 = 9000
o Minus the initial deposit bc it was already part of money supply
o Principles of money creation:
▪ No single banks create money - they re-lend some of what was deposited
▪ Money can only be created from excess reserves generated from deposits
▪ Money created through lending & redeposited (very important)
▪ If banks hold excess reserves, money creation is less
▪ If public holds cash - cash drain - money creation is also less
▪ If banks invest in bonds - money creation is less
• Less potential redepositing
• Open market operations
• Banks buy securities with ER => less money loaned and redeposited
▪ Max change in money supply = change in deposit * money multiplier
o The fed can only control by setting reserve requirement
o Fed regulates Money Supply by (monetary policy) _ TOOLS OF MONETARY POLICY
▪ **fed recently raised discount rate (what does it do with interest rates?)
▪ Setting and changing RR,
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