Everything Essay

1268 Words Nov 24th, 2013 6 Pages
PTER 16
Tools of Monetary Policy

Roadmap
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Market for reserves and federal funds rate
 Demand

and Supply  (Partial) Equilibrium  Comparative Static Analysis


Introduction to monetary policy tools
 Conventional

tools  Unconventional tools

Hyung Sun Choi, Kyung Hee University

Market For Reserves & Federal Funds Rate
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 



Demand and Supply in the Market for Reserves What happens to the quantity of reserves demanded by banks, holding everything else constant, as the federal funds rate changes? Fed Funds Rate: the interest rate on overnight loans of reserves from one bank to another.
 The

primary instrument of monetary policy

Hyung Sun Choi, Kyung Hee University

Demand for
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 An open market purchase causes the federal funds rate to fall whereas an open market sale causes the federal funds rate to rise (when intersection occurs at the downward sloped section).
Hyung Sun Choi, Kyung Hee University



Open market operations have no effect on the federal funds rate when intersection occurs at the flat section of the demand curve.

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Hyung Sun Choi, Kyung Hee University

Figure 2 Response to an Open Market Operation
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Hyung Sun Choi, Kyung Hee University

Discount Window Rate


If equilibrium is determined on the vertical section of the supply curve, a change in the dis-count rate will have no effect on the federal funds rate. If equilibrium is determined on the horizontal section of the supply curve, a change in the discount rate shifts that portion of the supply curve and the federal funds rate falls.



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Hyung Sun Choi, Kyung Hee University

Figure 3 Response to a Change in the Discount Rate
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Hyung Sun Choi, Kyung Hee University

Reserve

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