The Market for Reserves

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The Market for Reserves

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The Market for Reserves Demand for Reserves Supply of Reserves Market Equilibrium Expansionary Open Market Operations Contractionary Open Market Operations ... – PowerPoint PPT presentation

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Title: The Market for Reserves


1
The Market for Reserves
2
Demand for Reserves
When the federal funds rate is high,
the opportunity cost of holding excess
reserves is also high. Banks demand fewer excess
reserves. When the federal funds rate is low,
the opportunity cost of holding excess
reserves is also low. Banks demand more
excess reserves.
ffr
ff2
ff1
Demand
0
Reserves
Q1 Q2
3
Supply of Reserves
ffr
Supply
When the federal funds rate is high, banks borrow
more from the Fed, causing reserves to
rise. When the federal funds rate is low, banks
borrow less from the Fed, causing reserves to
fall.
ff2
ff1
0
Reserves
Q1 Q2
4
Market Equilibrium
ffr
Supply
Market equilibrium occurs where the demand for
reserves equals the supply of reserves.
ffeq
Demand
0
Qeq
Reserves
5
Expansionary Open Market Operations
ffr
S1
S2
Expansionary open market operations increase the
amount of reserves supplied to the banking
system. The supply curve shifts to the
right. The federal funds rate falls.
ff1
ff2
D
0
Q1
Q2
Reserves
6
Contractionary Open Market Operations
ffr
S2
S1
Contractionary open market operations decrease
the amount of reserves supplied to the banking
system. The supply curve shifts to the
left. The federal funds rate rises.
ff2
ff1
D
0
Q1
Q2
Reserves
7
Expansionary Discount Lending
ffr
S1
S2
Expansionary discount lending increases the
amount of reserves supplied to the banking
system. The supply curve shifts to the
right. The federal funds rate falls.
ff1
ff2
D
0
Q1
Q2
Reserves
8
Contractionary Discount Lending
ffr
S2
S1
Contractionary discount lending decreases the
amount of reserves supplied to the banking
system. The supply curve shifts to the
left. The federal funds rate rises.
ff2
ff1
D
0
Q1
Q2
Reserves
9
Increase in Reserve Requirements
ffr
When reserve requirements increase, banks must
hold more reserves. The demand for reserves
rises. The federal funds rate increases.
S
ff2
ff1
D2
D1
0
Q1
Q2
Reserves
10
Decrease in Reserve Requirements
ffr
When reserve requirements decrease, banks may
hold fewer reserves. The demand for reserves
falls. The federal funds rate decreases.
S
ff1
ff2
D1
D2
0
Q2
Q1
Reserves