Verified Document

Analyzing Money And Banking

Money and Banking Monetary Policy

If the central bank has an interest rate target, why would an increase in the demand for bank reserves lead to a rise in the money supply?

An increase in the demand for reserves will raise the central bank's fund target. So as to preclude such a possibility, the central bank will purchase bonds, thus increasing the amount of non-borrowed reserves. As a result, this shifts the supply curve for reserves to the right, thus maintaining the central bank's funds rate from increasing. The open market purchase will at that time instigate a rise in the monetary base and the money supply.

MS1 MS2

Interest Rate (4%) L2 (Y1)

L1 (Y1)

M/P

As indicated in the diagram, the assumption is that the central bank targets an interest rate of 4% per annum. Considering this, the money demand increases are offset by a change in the money supply. In the diagram above, the initial money supply level is indicated by MS1. The increase in demand level causes a shift of the money demand curve to L2 (Y1). This instance has a tendency of causing the interest rate to increase. When the central bank perceives the increase in the interest rate, it goes on to increase the money supply in reaction to decrease the interest rate back to its targeted rate, in this case assumed to be 4%. If the central bank succeeds in doing this, it causes the money supply to increase to MS2 (Schwartz, 2008).

II. The benefits of central bank lending to banks (rediscount operations) to prevent bank panics are obvious. What are the costs?

The costs are that banks that deserve to go out of business because of bad and ineffective management might survive owing to central bank discounting to preclude anxieties. This may result in an incompetent banking system with several ineffectively operated banks.

III. Compare the use of open-market-operations, central bank lending facilities (rediscounting), and...

The central bank has total control over the volume. Compare this to central bank lending facilities, in which the Fed sets the price at which to borrow but does not have direct control over how much the banks can actually borrow. Secondly, the open market operations are flexible and precise, as they can be used to sanction both small changes and large changes in the monetary base. Open market operations are also easily reversible. This is because the mistakes can be promptly rectified and corrected in a manner that would not have been conceivable with the other tools of monetary policy such as reserve requirements or discount lending. In addition, the open market operations can be implemented quickly. This is because there is no delay in terms of administration for conducting the open market operations. The orders go to the trading section in New York and are implemented instantaneously. With regard to rediscounting, the changes in the discount rate has to be proposed by the central banks or the Fed prior to being approved or sanctioned by the Board Governors. As a result, it is for this particular reason that rediscounting is considered neither easily reversible nor quickly implemented (Ireland, n.d).
As for reserve requirements being a monetary policy tool, they can be reversed, however, not as easily as they have to attain approval from the Congress if there are large changes in reserves. Consequently, large changes in the reserve requirements cannot be undertaken promptly and easily. In addition, if a bank holds a very minimal amount of excess reserves and the fed increases the required reserve ratio, then the bank is forced to quickly be in acquisition of reserves…

Sources used in this document:
References

Bogetic, Z., 2002. Costs and Benefits of Unilateral Monetary Unions. Montenegrin Economic Papers, (1).

Dellas, H. and Tavlas, G.S., 2009. An optimum-currency-area odyssey. Journal of International Money and Finance, 28(7), pp.1117-1137.

Ireland, Peter N. (n. d). "Money, Banking, and Financial Markets." Lecture Notes, Department of Economics, Boston College, irelandp@ bp. edu. Retrieved 30 June 2016 from: http://irelandp.com/ec261/chapter17a.pdf

Minford, P., 2002. The costs and benefits of Economic and Monetary Union to the UK economy -- the 'fifth (overview) test'. Cardiff Business School.
Cite this Document:
Copy Bibliography Citation

Related Documents

Money Banking and Financial Markets
Words: 2353 Length: 7 Document Type: Article Review

economic crisis in Europe and the increasing costs for European countries to borrow money and bail out other Euro countries in financial distress. The EU nations that use the Euro have experienced a crisis among certain countries with high debt requiring bailouts for Greece and Ireland and the likelihood that Portugal and Spain may also need a bailout. Postponing the restructuring of high interest debts has led to further

Analyzing Monetary Policy & International Finance and Exchange Rate...
Words: 1714 Length: 5 Document Type: Term Paper

Monetary Policy & International Finance and Exchange Rate Monetary Policy If the central bank has an interest rate target, why would an increase in the demand for bank reserves lead to a rise in the money supply? (Use demand & supply graph) A rise in the demand for reserves will increase the federal funds target. So as to preclude this, the central bank will purchase bonds, in so doing, increasing the amount of

Banking Sample the Banking Industry, Over the
Words: 2111 Length: 5 Document Type: Essay

Banking Sample The banking industry, over the last decade has undergone significant change. Industry regulation such as Dodd-Frank, Basel 3, and international capital requirements have now made the industry safer and more transparent. However, due primarily to the crisis of 2008, some banks are more stable than others. In many instance, due to unethical practices of the past, many banks are now suffering as they struggle to attract market share and

Money Interest Rates Important Individuals Businesses Making
Words: 913 Length: 3 Document Type: Essay

Money Interest Rates important individuals businesses making decisions finance purchases. The articles deal assessing conditions finance purchases important aspects policy. Allen, Bruce. Interest Rates The high unemployment and inflation rates are some of the most important factors that threaten to affect the stability of the U.S. economy. As a consequence, the Federal Reserve is forced to orient its strategy towards reducing the money supply. There are several methods and tools that the

Banking Fees and Morality Integrating Values: The
Words: 5580 Length: 15 Document Type: Term Paper

Banking Fees and Morality Integrating Values: The Legal, Moral, and Social Responsibility of the Government, the Banks, and the Consumers Legal Section Statement of Relevant Legal Principles and Rules of Law Application of Law to Topic and Legal Analysis Ethics Section Utilitarian Ethical Analysis Kantian Ethical Analysis Additional Ethical Analysis Social Responsibility Section Introduction to B. Definition of term "Social Responsibility" Application of Social Responsibility Banking fees in one form or another have existed in the United States hundreds of years, however the

Banking Industry Bank of America Corporation Analysis
Words: 1519 Length: 4 Document Type: Essay

Banking Industry Bank of America Corporation Analysis The Bank of America-Financial and Competitive Analysis Background of the Bank of America The Bank of America Corporation (BAC) is a Public Company that provides multinational banking services and other specified financial services. The bank was conceptualized in 1998, with its headquarters in North Carolina; U.S.A. according to asset valuation, the company comes second in the States, and serves over 100 states. The corporation also has many

Sign Up for Unlimited Study Help

Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.

Get Started Now