TM 3 Deposit Creation part 1 Liability of Federal Reserve

Summary

The transcript discusses essential concepts of monetary economics, focusing on the movement of money supply, its control, and the role of central banks in regulating the economy. It explains the process of managing the money supply through actions like adjusting interest rates, selling bonds, and how these affect the economy's circulation. The interaction between financial institutions, depositors, and borrowers is explored, including the concept of financial intermediation. Additionally, it covers the accounting aspects of central bank and banking operations, highlighting the importance of maintaining the money supply balance to foster economic transactions.

Takeaways

• 😀 The movement of money supply is crucial in monetary economics and is controlled by the Central Bank to stabilize the economy.
• 😀 The Central Bank influences the money supply through interest rates, bond sales, and other financial policies to either expand or contract the economy.
• 😀 When the Central Bank raises interest rates and sells bonds, it withdraws money from the economy to curb inflation.
• 😀 Lowering interest rates and purchasing bonds injects more money into the economy to stimulate economic growth.
• 😀 The main role of financial institutions is to act as intermediaries between those who have excess funds and those who need funds, impacting money circulation.
• 😀 In economic theory, there is a distinction between money that is in circulation (public holding) and money held by depository institutions.
• 😀 Reserve requirements and excess reserves are significant in understanding how much money is available in the banking system.
• 😀 Accounting plays a key role in tracking the movement of money supply, with different categories for circulation and deposits in financial institutions.
• 😀 The Central Bank's policies aim to control inflation and stimulate economic activity, based on the current economic conditions.
• 😀 Central Bank's policies directly impact businesses, including investment decisions, pricing strategies, and overall financial planning.
• 😀 An understanding of how the money supply operates allows individuals and institutions to make informed decisions regarding the economy and their finances.

Q & A

What is the main focus of Chapter 15 as discussed in the script?

Chapter 15 focuses on the movement of money supply and its impact on the economy. It emphasizes the role of central banks in regulating the money supply to maintain economic stability.

How does the central bank control the money supply?

The central bank controls the money supply by either increasing or decreasing it. When the central bank wants to reduce the money supply, it raises interest rates and sells bonds to the public, which leads to money flowing out of circulation. Conversely, if it wants to increase the money supply, it buys bonds, injecting money into the economy.

What happens when the central bank raises interest rates?

When the central bank raises interest rates, it makes borrowing more expensive, which leads to a decrease in the money supply. People and businesses are less likely to borrow, and the overall circulation of money decreases.

What is the purpose of buying and selling bonds by the central bank?

The central bank buys and sells bonds as a way to manage the money supply. Selling bonds removes money from circulation, while buying bonds injects money into the economy.

What is meant by 'money in circulation'?

Money in circulation refers to the physical cash and currency that is actively being used by the public. It is the money that is held by individuals and businesses, excluding money held by banks or other financial institutions.

How do depository institutions contribute to the money supply?

Depository institutions, like commercial banks, contribute to the money supply by accepting deposits and providing loans. These institutions act as intermediaries, channeling funds from savers to borrowers, which influences the amount of money in circulation.

What is the role of a financial intermediary in the money supply process?

A financial intermediary, such as a bank, takes deposits from those with excess funds and loans these funds to borrowers. By facilitating the flow of money between savers and borrowers, financial intermediaries help control and influence the money supply.

What is meant by 'excess reserves' in banking?

Excess reserves refer to the funds that a bank holds beyond the required reserves set by the central bank. Banks are not obligated to keep these excess reserves and may choose to lend them out or invest them, which can further affect the money supply.

How does the reserve requirement affect the money supply?

The reserve requirement is the portion of deposits that banks must hold in reserve and not lend out. A higher reserve requirement reduces the amount of money banks can lend, contracting the money supply, while a lower reserve requirement allows banks to lend more, expanding the money supply.

What factors influence the money supply according to the script?

The money supply is influenced by several factors, including the actions of the central bank (such as interest rates and bond transactions), the behavior of commercial banks (such as reserve holdings and lending), and the public's demand for cash and credit.