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ECON 302 What to know for the exam

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Economics (Arts)
ECON 302
Tom Velk

ECON 302What to know for the examSettingDemandandSupplyandlinkswithISLMcurvesYou can bring a simple calculator nothing like a computer Probably wont need it but you can bring it anywayYou can bring a translation dictionary6 questions each worth 16 23Each has parts all weighted differentlyPay attention to questions from the midterm as a predicting deviceNot exactly the same questionsWhere will he go for questions Places where you can pick out a direct unambiguous answer Review of midterm material 2025Schoolbriefs Setting Demand and Supply and links with ISLM curvesMishkin Monetary and fiscal policy in the ISLM model and Aggregate supply and demand analysis Understand what they are about and how the curves move with a fiscal or monetary policy etcDunnChapters UnderstandtheBOP curve What is the curve about why is it in an ry graph What does a shift in the curve represent Whatdo fixed or flexible exchangerates implyinthis setting etcGreenBookPart 1 Summary Understanding the challenges to policyFirst three chaptersInstrumentsNote issuance facilitiesOptions futuresInterest rate instrumentsChapter 10 Risk Discussion RisksTrading StrategiesGlossary of TermsTaylorRuleNotes taken during conferenceNotes available on WebCTBankingM2 MultiplierReview notes on the functions of central banksWhat is the difference between private and governmentled central banksMishkinCentral Banking and the Conduct of Monetary PolicyCommercial BankingFinancialMarketsMishkinRisk and Term Structure of Interest Rates Yield CurvesArticlesEssaysKahn 2010Monetary Policy under a Corridor Operating FrameworkHanke 1998How to Establish Monetary Stability in Asia Currency BoardsBackettiRoberts 1990 Will increased regulation of stock index futures reduce stock market volatilityMorrisEngel Challenges to Stock Market Efficiency Evidence from Mean Reversion StudiesSDaSalwIcDUtWeiiGTF01Monetary Policy under Corridor Operating FrameworkDuring the 20082009 global financial crisis the Feds balance sheet balloonedFederal Open Market Committee FOMC cut federal funds rate target to near 0 and many novel liquidity facilities were introducedFOMC also purchased many LT Treasuries and agency backed securities on a large scaleBecause of this unprecedented size the New York Fed found it difficult to achieve the FOMC target funds rateTherefore the Federal Reserve began paying interest on excess reserves expected to establish a floor under the federal funds rateThe Federal Reserve rate now thus incorporates the essential elements of a channel or corridor systemIn this system there would be a target in between the discount rate ceiling and the interest rate on excess reserves floorThis is important to exit its highly accommodative stanceThe paper has two sectionsPart I describes the how the Federal Reserve has south to target its Federal Funds rateThe second part explains the advantages of a corridor system and discusses the potential problems in implementing in the USPart I How has the Federal Reserve Traditionally OperatedTraditional FrameworkFOMC sets targets based on objectives ofMaximum employmentStable pricesModerate LT interest ratesThe FOMC instructs the Open Market Trading Desk at the NY Fed Reserve to conduct open market operations to achieve this targetThe NYFR estimates the quantity of reserves demanded given the rate and then supplies the reserves to meet this demandThis demand for reserves comes from reserve requirements set by the Fed Board of Governors and limited by CongressAmount demanded depends on amount of deposits the public holds in depository institutions These financial institutions usually hold more than what is required as a precaution and maintain settlement balances at the Fed to clear and settle transactions with each other and the FedThe demand is inversely related to the federal funds rate As the rate decreases there is a higher demand for overnight loans of reservesHigh interest rates cause public to reduce their holdings in these financial institutions and increase holdings of transactions deposits not subject to reserve requirementsHigher interest rates cause financial institutions to limit their holdings of excess reserves and settlement balancesThe supply depends on the size of the Feds portfolio of securities and repurchase agreementsAmount of loans made to depository institutions through discount windowAutonomous factors such as public demand for currency and Treasurys balance in the FedThe supply can be manipulated byOpen market purchases or sales of securities can buy securities from public and credit money to sellers bankThrough repurchase agreements or reverse RPIn terms of the federal funds rate it can be manipulated by increasing the supply of reserves vice versaBecause of autonomous factors and volatility in demand for reserves the funds rate may differ from targetsWhy the traditional framework no longer worksScarcity of reservesIn the mid1990s the Fed reduced reserve requirements and Because the reserve requirements reduced the amount that could be used to invest in interest bearing assets producing financial market distortions the Fed reduced the requirementsFor nontransactions accounts it is 0For transactions accounts it is 10 banks then found ways to reduce their demand for required reservesCertificates of deposit Eurodollar borrowing repurchase agreements and sweep accounts all not subject to reserve requirementsThis lack of funds created concerns that the Fed could be losing control over the federal funds rateIf the reserve requirements fell below the level depository institutions maintains in clearing and settlement balances at the Fed the funds rate would not depend on the demand for reservesInstead it would depend on the demand and supply of settlement balancesTherefore it would depend on payment flows and institutional features of the payments system such as penalties for overdraftsIf this demand for settlement balances were more volatile and difficult to predict than traditional demand for reserve balances it would be hard to determine the open market operations necessary to hit the federal funds rate Then the funds rate would become volatile and difficult to controlAn abundance of reservesHowever now there is an excess of reservesThis occurred through expansion through provision of liquidity to key credit markets and lending to financial institutionsThen it began a large scale asset purchase program buying 125 trillion of agency mortgage backed securities and 300 billion in LT securitiesThese were financed by the creation of bank reserves in excess of reserve requirementsThe ultimate goal was to stimulate the economy through lower ratesBecause of the abundance the Fed was supplying more reserves than was demanded at the federal funds rate and it then fell below the target rate
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