Chapter 14 The Fed, Money, and Credit

Money stock determination: the components M=CU+D; The currency-deposit ratio: cu=CU/D; The reserve-deposit ratio: re=R/D; Monetary base: CU+R. The monetary base is controlled by the Fed.

The money multiplier The formula: Smaller re implies larger money multiplier; Smaller cu implies larger money multiplier.

Controlling the stock of high- powered money Open market purchase:  Buying treasury bill from the public increases the monetary base by the same amount. Loans and discount:  Bank borrowing from the Fed increase the monetary base by the same amount. Foreign exchange operation:  Buying foreign currency from the public increases the monetary base by the same amount.

The money supply function and the instruments of monetary policy Money supply: M=mm(i, i D, re, cu,  )  H; Money demand: M/P=L(i, Y); Money supply is upward-sloping in i; Money demand is downward-sloping in i; Money market equilibrium:

The money supply function and the instruments of monetary policy Equilibrium in the money market and the effects of an increase in H.

Control of the money stock and control of the interest rate Targeting arbitrary (M, i) is impossible; Open market purchases targets the interest rate;

Money stock and interest rate targets If fluctuations in output are caused by the IS curve, the Fed should target the money stock.

Money stock and interest rate targets If fluctuations in output are caused by the money demand, the Fed should target the interest rate.

Money stock and interest rate targets Interest rate targets apply to short run only, and may vary in the long run; In the long run, money stock should be the only target.

Money, credit, and interest rates Another target: credit quantity  Credit may be tightly connected to investment and GDP;  Credit may have a more direct impact on output than money stock and the interest rate;  Credit rationing may undermine the effectiveness of interest rate target;  But the Fed is not able to control credit directly.