Chapter 29

Slides

VNP-Econ-Chapter 29
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29-4c Problems in Controlling the Money Supply

The Fed’s various tools—open-market operations, bank lending, reserve requirements, and interest on reserves—have powerful effects on the money supply. Yet the Fed’s control of the money supply is not precise. The Fed must wrestle with two problems, each of which arises because much of the money supply is created by our system of fractional-reserve banking. […]

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29-4b How the Fed Influences the Reserve Ratio

In addition to influencing the quantity of reserves, the Fed changes the money supply by influencing the reserve ratio and thereby the money multiplier. The Fed can influence the reserve ratio either through regulating the quantity of reserves banks must hold or through the interest rate that the Fed pays banks on their reserves. Again, […]

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29-4a How the Fed Influences the Quantity of Reserves

The first way the Fed can change the money supply is by changing the quantity of reserves. The Fed alters the quantity of reserves in the economy either by buying or selling bonds in open-market operations or by making loans to banks (or by some combination of the two). Let’s consider each of these in […]

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29-4 The Fed’s Tools of Monetary Control

As we have already discussed, the Federal Reserve is responsible for controlling the supply of money in the economy. Now that we understand how banking works, we are in a better position to understand how the Fed carries out this job. Because banks create money in a system of fractional-reserve banking, the Fed’s control of […]

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29-3d Bank Capital, Leverage, and the Financial Crisis of 2008–2009

In the previous sections, we have seen a very simplified explanation of how banks work. The reality of modern banking, however, is a bit more complicated, and this complex reality played a leading role in the financial crisis of 2008 and 2009. Before looking at that crisis, we need to learn a bit more about […]

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29-3c The Money Multiplier

The creation of money does not stop with First National Bank. Suppose the borrower from First National uses the $90 to buy something from someone who then deposits the currency in Second National Bank. Here is the T-account for Second National Bank: After the deposit, this bank has liabilities of $90. If Second National also […]

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29-3b Money Creation with Fractional-Reserve Banking

Eventually, the bankers at First National Bank may start to reconsider their policy of 100-percent-reserve banking. Leaving all that money idle in their vaults seems unnecessary. Why not lend some of it out and earn a profit by charging interest on the loans? Families buying houses, firms building new factories, and students paying for college […]

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29-3a The Simple Case of 100-Percent-Reserve Banking

To see how banks influence the money supply, let’s first imagine a world without any banks at all. In this simple world, currency is the only form of money. To be concrete, let’s suppose that the total quantity of currency is $100. The supply of money is, therefore, $100. Now suppose that someone opens a […]

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