Macroeconomics
In summary, automatic stabilizers reduce the intensity of economic fluctuations but do not solve them .Fiscal and other economic policies are neededto solve economic fluctuations. F. The Reserve Market Model Asexplainedinthepreviouschapter, centralbanksplayaroleinachievingmacroeconomicobjectives such as price stability and full employment using monetary policy . To understand the short- and long-runeffectsofmonetarypolicyontheeconomy,wemustfrstunderstandhowitworksindifferent banking systems, including ones with limited and ample reserves. The table below is a recap of the differences in implementing monetary policy between the limited reserve and the ample reserve banking systems.
Table 2: Monetary Policy in Banking Systems with Limited vs. Ample Reserves In a Banking System with Limited Reserves:
In a Banking System with Ample Reserves:
● The central bank frequently manages the supply of reserves. ● The amount of reserves is limited such that small changes in the supply of reserves influence the policy rate. ● Quantity-based policy tools are used, meaning that the money supply is changed to affect interest rates. ● Open market operations are the key policy tool used since they directly impact money supply. ● The money multiplier is effective since it influences money supply.
● The Fed does not frequently manage reserves since their supply is usually more than needed (ample). ● Reserves are large enough that small changes in their supply do not influence the interest rate. ● Interest-rate based policy is used, meaning that the Fed directly influences the interest rates (through administered rates rather than money supply). ● IOR is the key policy tool used to affect interests, whereas open market operations are only used occasionally to maintain suffcient reserves. ● The money multiplier is ineffective since rr is no longer a tool and is equal to zero.
The Reserve Market Model Graph A reservemarketmodelgraph explainsthemarketforreservesandthedifferencebetweenlimitedand amplereserves.ItplotsthequantityofreservesthatbanksholdwiththeFedonthehorizontalaxis,and the policy rate (the federal funds rate) on the vertical axis.
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