2. Control of the Monetary Base Assets Liabilities Government securities Currency in circulation Discount loans Reserves Coin Foreign deposits Monetary base(high-powered money) MB〓+R
2. Control of the Monetary Base Assets Liabilities Government securities Discount loans Coin ... Currency in circulation Reserves Foreign deposits ... Monetary base (high-powered money) MB =C+R
2. Control of the Monetary Base The Fed exercises control overthe monetary base mainly through two ways its purchases or sale of government securities in the open market its extension of discount loans to banks Essential way y open market operations(oMO open market purchase OMP) from banks or from the public open market sale oMs) to banks or to the public
2. Control of the Monetary Base • The Fed exercises control over the monetary base mainly through two ways • its purchases or sale of government securities in the open market • its extension of discount loans to banks Essential way open market operations(OMO) • open market purchase (OMP) from banks or from the public • open market sale (OMS) to banks or to the public
2.1 Open Market Purchase froni a/Bank Fed purchases $100 of securities tror a bank and pays for them with a s100 check The balance sheet of banking system Assets Liabilities Securities -$100 Reserves +$100 the balance sheet of Fed Assets Liabilities Securities +$100 Reserves +$100 NEXT
2.1 Open Market Purchase from a Bank • Fed purchases $100 of securities from a bank and pays for them with a $100 check. Assets Liabilities The balance sheet of banking system Assets Liabilities the balance sheet of Fed Securities -$100 Reserves +$100 Securities +$100 Reserves +$100
2.1 Open Market Purchase from a Bank The net result of this mP Reserves have increased by $100 ●MB=c+R As R increase, MB will rise by the same amount
2.1 Open Market Purchase from a Bank • The net result of this OMP • Reserves have increased by $100 • MB=C+R • As R increase, MB will rise by the same amount
2.2 Open Market Purchase from the nonbank public Case 1F o Assume that the person or corporation who sells $100 of securities to the Fed, and deposits the Feds check in the local bank
2.2 Open Market Purchase from the Nonbank Public • Case 1: • Assume that the person or corporation who sells $100 of securities to the Fed，and deposits the Fed’s check in the local bank