ECON-UA 1 Lecture 30: 30

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30
functions of the fed
a) sets required reserve ratio
(have liquidity, enough cash)
b) lender of last resort
(borrow from feds to prevent selling of assets immediately, preventing
liquidity problem to turning into solvency problem)
c) set capital requirements
(minimum capital ratio: ensuring bank has enough SE to cover loss of IOU)
d) ensurer of bank accounts
(1933 FDIC-federal deposit insurance corp, all member banks in the country
is protected by FDIC, ensured bank accounts)
depositor would not care which bank lends money to (irresponsible)
depositors not watching the bank
e) regulation of lending
bank lending money are regulated
f) stabilise the macroeconomy
1978 “duel mandate” two goals: price stability and full employment
price stability defined as 2% per year
full employment not defined
feds main tool in stabilising macroeconomy
manipulate interest rates by changing money supply
Δ money supply through open market operations: fed buys or sells government
bonds in order to Δ money supply
suppose:
fed wants to increase the money supply
fed will buy gov bonds from public
assume:
1) RRR = 0.1
2) no banks holds excess reserves
3) public’s cash holdings remain constant
fed buys $100,000 in government bonds from a bond dealer who has a checking
account at citibank
bank #1 ΔAssets ΔLiability
dealer deposits
$100,000 check
+
$100,000
check
$100,000 re
serves
+
$100,000
checking
acc
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