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Lecture Principles of money, banking, and financial markets (12th edition): Chapter 20 - Ritter, Silber, Udell

Chapter 20 - Understanding movements in bank reserves. In this chapter you will learn to analyze the Federal Reserve balance sheet and how changes in its assets and liabilities impact the money supply, explain how the U.S. Treasury Department's spending decisions impact the money supply, understand the bank reserve equation, define the monetary base. | Chapter 20 Understanding Movements in Bank Reserves Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Learning Objectives • Analyze the Federal Reserve balance sheet and how changes in its assets and liabilities impact the money supply • Explain how the U.S. Treasury Department’s spending decisions impact the money supply • Understand the bank reserve equation • Define the monetary base Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-2 Introduction • The balance sheet of the Fed shows the movements of reserves in the system • Very complicated since many things can impact the level of reserves – – – – Open Market operations and Discounting Other entries may offset movements in reserves The Fed does not control many of these items US Treasury can add or absorb bank reserves through fiscal spending or tax revenue Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-3 1 Introduction (Cont.) • Bank Reserve Equation – The expanded view of reserve movements – A summary sheet for sources and uses of reserves – Useful for monitoring trends in reserves— fundamental framework of monetary control. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-4 The Fed’s Balance Sheet • Table 20.1 is a simplified balance sheet of the Federal Reserve System in mid-2003 • Every item on the balance sheet (asset or liability) has an effect on reserves – Total assets = total liabilities – Fed’s total liabilities include reserves—“bank deposits” in the Fed plus cash in bank vaults – Therefore, bank reserves must equal total Federal Reserve assets minus all other Fed liabilities – Anything affecting a Fed’s asset or liability must alter reserves, unless it is offset somewhere else in the balance sheet Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-5 TABLE 20.1 The Federal Reserve’s Balance Sheet (March, 2008, in billions of dollars) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 20-6 2 The