38. The role of banking sector - creation process.

There are 2 crucial functions:

• they receive funds from depositors and, in return, provide these depositors with a checkable source of funds or with interest payments.

• they use the funds that they receive from depositors to make loans to borrowers; that is, they serve as intermediaries in the borrowing and lending process.

When banks receive deposits, they do not keep all of these deposits on hand because they know that depositors will not demand all of these deposits at once.

Instead, banks keep only a fraction of the deposits that they receive.

• The deposits that banks keep on hand are know as the banks' reserves.

• The reserve requirement is the fraction of deposits set aside for withdrawal purposes ( is determined by the nation's banking authority).

• Deposits that banks are not required can be lent to borrowers, in the form of loans.

• Banks profits is the difference between higher rates of interest

39. Money – creation system. Money multiplier.

Money creation - is the process by which the money supply of a country or a monetary region is increased

Money Multiplier.

The amount by which bank deposits expand in response to an increase in excess reserves is found through these of the money multiplier.

• If some loan funds are held as currency, then there is a leakage of money out of the banking system

• money multiplier will still be greater than 1, but less than inverse of the reserve requirement.

Mm(Money Multiplier)=1/r r (reserve requirement)*100%

40. Monetary policy: goals and instruments.

Goals.

To assist the economy in achieving

• a full-employment

• noninflationary level of total output

Tools of monetary policy.

• Open-market operation;(операции на открытом рынке: купля-продажа гос. ценных бумаг)

Buying and selling (from/to commercial banks and the public) of government bonds by the Central Bank in the open market.

Buying from commercial banks:

-Commercial banks give up part their holding of securities

-The CB pay for these securities by increasing the reserves of commercial banks.

• The reserve ratio;(норматив обязательного резервирования)

Raising the reserve ratio increases the amount of reserves banks must keep. Banks lose excess reserves, diminishing their ability to create money by lending. They are forced to contract the money supply.

• The discount rate.(учетная ставка или ставка рефинансирования)

Commercial banks borrowng from the CB increases the reserves of commercial banks, enhancing their ability to extand credit.

41. Types of monetary policy.

• “Easy money” policy

The economy is faced with recession.

The CB:

- buyes securities

- reduces the reserve ratio

- lowers the discount rate

• “Tight money” policy

Th economy is faced with inflation.

The CB:

• sells securities

• increases the reserve ratio

• raise the discount ratio

42. Effectiveness of monetary policy. ?

43. “IS –LM” model: equilibrium.

Model IS - LM (investment - savings, liquidity preference - the money) - a model of commodity-money balance, allowing to identify economic factors that determine the function of aggregate demand. The model allows to find such a combination of market rate (R) and income (Y), at which time equilibrium is reached in the commodity and money markets. It is a concretization of the model AD-AS.

The curve IS - the equilibrium curve for the commodity market. The lower rate%, the higher the level of income. Under the influence of increased public spending or tax cuts IS curve shifts to the right.

The curve LM - the equilibrium curve in the money market. It captures all the combinations of Y and R, which satisfy the demand for money at a given value of Central Bank money supply (Ms). At all points of the demand for money equal to their proposal.

The curve LM - the higher the income, the higher the interest rate. Increasing the money supply or decrease in the price level shifts the LM curve to the right. Equilibrium in the model at the point of intersection of the IS and LM.