03/04/16      UNIT 4: Open Market Operations

#1) The Reserve Requirement- 
- Only small percent of your bank deposits is in the safe. The rest of your money has been loaned out. This is called "Fractional Reserve Banking."

   - The FED sets the amount that banks must hold
   - The reserve requirement (reserve ratio) is the percent of deposits that banks must hold in reserve and NOT loan out.
   - When the FED increases the money supply (MS) it increases the amount of money held in the bank deposits.


1 - If there is a recession what should the FED do to the reserve requirement?
      - Decrease reserve ratio
              - banks hold less money and have more excess reserves (ER)
               -banks create more money by loaning out excess
               -money supply increases, interest falls, AD goes up.
            
2 - If there is inflation, what should the FED do to the reserve requirement?
      -increase the reserve ration
            -banks hold more money and have less excess reserves
            -banks create less money
            -money supply decreases, interest rates increases, AD goes down.



#2) The Discount Rate 
- The interest rate that the FED charges commercial banks.

EX.
 - if Bank of America needs $10 million, they borrow it from the US Treasury, but they must pay it back with interest

To increase the money supply, the FED should DECREASE the discount rate (easy money policy)
To decrease the money supply, the FED should INCREASE the discount rate (tight money policy) 


                                               

#3) Open Market Operations (OMO)
the FED buys/sells government bonds (securities)
this is the most important and widely used monetary policy

To increase the money supply, the FED should BUY government securities.
To decrease the money supply, the FED should SELL government securities.


Federal Funds Rate - FDIC member banks loan each other overnight loans
Prime Rate - interest rate that banks give to their most credit worthy customers


*When a customer deposits or withdraws cash from their account (check-able) it has no effect on money supply.

It Only Changes:
composition of money
excess reserves
required reserves

Single Bank

Loan from excess reserves (ER)
EX: Chase bank
Banking System

ER x Multiplier (total money supply)

EX: Chase, Wells Fargo, BOA

03/12/16     

UNIT 4: FED & The Creation of Money

Reserve requirements

-fed requires banks to always have same money readily available to meet consumers demands for cash

-the amount set by fed, is requires reserve ratio

- the most common required reserve ratio = 10%

-the required reserve ratio is the 5 of demand deposits (checking account balances that must not be loaned out

Banks Create money by loaning out fractions of deposits that people put into the bank (as shown in the above photo.)

-by using a balance sheet or a T- account which shows liabilities and assets, potential loans can be calculated.

Bank Liabilities (the right side of the T-account sheet)

-demand deposits (DD) or check able deposits (CD):
    -cash deposits from the public
    -they are liabilities because they belong to the depositors


-owners equity: the values of stocks held by the public ownership of banks shares

Bank assets (the left side op=f the T- account sheet)

-Required Reserves (RR): percentages of demand deposits that must be held in the vault so that some depositors have access to their money


-Excess Reserves (ER): source of new loans

-Securities (bonds)- can be purchased by a bank from the Federal Reserve. These bonds can be purchased from the banks and turned into cash and immediately becomes available as excess reserves

03/14/16

    UNIT 4: Money

Types of Money

 -Commodity Money: It gets its value form the type of material from which it is made

Ex: Gold & Silver coins

-Representative Money: It is paper money back from something tangible that gives it value

Ex: IOU Money

-Fiat Money: Money basic the government "said so"

   Characteristics of Money

-Divisible: break the dollar bill into many ways.

-Portable: Put your money in socks, bra

-Uniform: A dollar it’s a dollar, doesn’t matter if you change the president but a dollar is a dollar.

M1 Money: 

-75 percent of money that comes from circulation comes from here (It is liquid- easy to convert)

-Cash and coins >Currency

-Checkable deposits >Demand deposits 

-Traveler’s checks

M2 Money:

-Consists of M1 Money, Savings accounts, and deposits held by banks outside of the USA

-Saving Account is not a transaction where you can’t pull out ( Only transfer from the saving to checking account)

M3 Money:

-Consists of M2 Money and certificated of deposit money know as CD’s

-CD’s are accounts that apply the concept of keeping money over a period of time, then that money will grow.

Time Value of Money

-A dollar today is worth more than a dollar tomorrow

Why?

  - Opportunity cost & inflation

  - This is the reason for charging and paying interest

How to Calculate 

- Let:

     V = future value of money

     P = present value of money

     r = real interest rates (nominal rate- inflation rate)

     n =  years

     k = number of times interest is credited per year

The Simple Interest formula

v= (1+r)^n *P

Compound Interest Formula

v= (1+ r ) ^nk * P

Here is a veryyyyy important video that will help you guys out with the most important parts of Unit4: Monetary Policy. Take notes and enjoy!

https://m.youtube.com/watch?v=qDro-FIv8t4