Query of ECO level1

[lovkesh k]

Hi Guys,

I' have two queries from :

1. from "How banks create money" reading 24 study session 6

"When Fed buys securities from a bank, the bank's reserves
increases but is deposits remains unchanged."
shouldn't both increase ? can please throw more lght on this
statement?

2. pg. 379 from "How banks create money" reading 24 study session 6. i
cudnt understand following eqns

Monetary base = Desired currency holding + desired reserves ??
Quantity of money = Deposits + Desired currency holdings ??

Thanks
Lovkesh

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[lovkesh k]

Got my answer for the Ist query. Anybody having answer for the second?

[lovkesh k]

I got one more query:

Doesn't the following two statements look contradictory:

1. "Inc in money supply reduces federal fund rates as well as
other short term rates(T-bill rate) and long term rates(= short term
rate + premium for expected inflation) which lead to inc in the
investments(businesses) and consumption(automobiles and other goods
financed by short term loans)."

2. its in the end of 24.d reading 25 session 6 economics book
schweser notes.
"higher rates od growth of money supply lead to higher
rates of inflation, higher rates of expected inflation and HIGHER
NOMINAL INTEREST RATES"

Please clarify what point i'm missing in co-relating the two
statements.

Thanks
Lovkesh

[Uday]

Hi Lovkesh,
The interest rates are different; the rate that
we are talking about in point one is the real interest rate - which is
governed by supply (controlled by the Fed) and demand, and the second
rate is the nominal rate - which is real interest rate + inflation -
hence as the inflation increases, so does the nominal rate.

Cheers,
Uday.

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