00:01
So here we're asked a series of questions about monetary operations, the monetary system, and the supply of money and credit.
00:09
So first of all, if the fed wants to increase the money supply, it needs to buy, sorry, it needs to buy bonds.
00:19
Absolutely, yes.
00:21
Because when it buys bonds, it pays in cash, right? so that leaves banks with more cash, increasing the money supply, right? the federal reserve is buying bonds from the private sector banks and giving them cash in return, leaving the banks with more cash, increasing the money supply.
00:43
Reducing the reserve requirement increases money supply, right? when banks have to hold less reserves, less reserves means more lending.
01:01
And remember, lending is the heart of money creation.
01:06
Banks create money by making loans, right? they loan out money to a firm.
01:13
That firm redeposits the money into the banking system.
01:15
The bank makes another loan.
01:17
Remember, money creation happens when banks make loans.
01:20
So when banks have to hold less cash, they can make more loans increasing the money supply, right? so here in the third one, we're trying to increase the money supply again.
01:33
We want to reduce the rate on reserves.
01:42
And again, the logic is very similar.
01:44
When the fed reduces the rate it wants to pay on reserves, banks will choose to hold less reserves, right? if the fed offers you bad deals on reserves, you will take your money and go elsewhere.
02:01
Choose less reserves and more lending...