What are the players in the money supply process?
- 1. Federal Reserve
- 2. Banking system
- 3. Public
Monetary base (MB)=
Currency + Reserves in the banking system
- the fed has a wide ability to contro the moneytary base
Links the monetary base to the money supply: with a stable money mutlitplier the fed can control the money supply
The fed changes monetary base through open-market operations
The open market purthcase of 100$ has increase reserves by that amount: therfore the monetary base has risen by 100$.
-puting money in to the bank coming from the fed
Open market purchase from the publie
- If the security was purchased by the nonbank public and the money fo the sale of the bond is deposited into the bank...
- -The fed has perfect control over monetary base=pretty stable
- * the effect of an open market purchase on the reserves depends on whether the seller of the bonds keeps the proceeds from the sale in currency or deposits
- * the effect of an open market purchase on the monetary base is to always increase the base by the amount of the purchase
Base =Bnon+ BR (bank reserces)
* the fed has complete control over the nonborrowed monetary base (through open market operations) but only partial control over borrowed reserves (it cannot fully determin how much banks borrow but it does set the discount rate