Economics Final Review

Monetary Policy

Mon Base = curr + bank res, MS = curr + depositis. MS = mm x mon base. Ppl hold cash – cu inc and mm decl. dec in MS. To give cust cash, bank must xch res at fed for curr, base same but more curr and less res. Inc in r hold less curr MS rises b/c public cash-ratio cu dec. mm rise and so will MS. MB unchanged. Bank obtain discount loan from fed inc reserves. MB and MS rise. No other effect. Inc uncertainty about dep w/drawl bank holds less res. Mm falls b/c xr, reserve-holding ratio inc, mm lower bc of dec in lending vol and fewer deposits, MS dec. fed buys lots of l/t treasure bonds for QE inc res and MB. MS inc. mm is unchanged. Fed sells bonds MB drops as bank res fall. Mm unchanged. MS decreases. R rises given dec MS = greater demand for money LM shift left. Fed changes res req’t. MB not affected, mm inc and banks make more loans create more deposits. MS increases. R falls b/c inc MS. Bank incr excess reserve reqt. MB not affected, mm decr, MS dec b/c fewer loans and deposits, r rise b/c dec in MS = excess d for money shift LM left. Fed buys yen but sterilizes the intervention. MB-selling dollars to buy yen inc bank res and inc MB by same amount. In order to sterilize (prevent MB and MS from rising) the Fed would sell same amt in gov’t bonds which reduces assets (bonds) and liabilities (bank res) so the base returns to original elvel. No change in base. Mm unchanged. MS unchanged, r rise b/c inc bond supply causes ES of bond and prices on them fall as r rises.

In GD: run on banks, inc holdings, cu rose, mm dec and MS fell.

Explain why fed can’t target both MS and r at same time. Graph - Money demand (Md/P) on x and r on y. Ms/P vertical line and Md/p downward sloping line. $$ mkt equil must be at a pt on the $$d curve. If fed wants to target r, must supply a M/P so equil is at that point r. cannot have both M/P1 and r0 since not a pt on $ curve. Explain effect of inc in c. if fed targets MS, what happens to GDP and r? inc in C shifts IS...