Chapter 13: Central Banking

In This Lecture…..

Bangladesh Bank
Controlling the Money Supply
Open Market Operations
The Required Reserve Ratio
The Bank Rate
Functions of Bangladesh Bank
Control the money supply
Supply the economy with paper money
Provide check clearing services
Hold depository institutions’ reserves
Supervise scheduled banks
Serve as the government’s banker
Serve as the lender of last resort
Serve as a fiscal agent for the Treasury.
 Self-test Questions
The president of which Federal Reserve
District Bank holds a permanent seat on
the Federal Open Market Committee
(FOMC)?
What is the most important responsibility
of the Fed?
What does it mean to say the Fed acts as
“lender of last resort”?
 Tools for Controlling the Money
Supply
Open Market Operations
Required Reserve Ratio
Bank Rate
 Open Market Operations
Open Market Purchase - The buying of
government securities by BB.
Open Market Sale - The selling of
government securities by BB.
 Open Market Purchases
BB buys Tk.5 million worth of government securities from
bank ABC.
The securities leave the possession of bank ABC and go to
BB.
BB pays for the government securities by increasing the
balance in bank ABC’s reserve account.
 Open Market Sales
BB surrenders the securities to bank XYZ and is
paid with Tk.5 million previously deposited in bank
XYZ’s reserve account at the BB.
 Required Reserve Ratio
Fraction of total deposit collected by a
commercial bank that must be kept as
reserve.
Maximum change in checkable deposits =
(1/r) x ΔR (r=required reserve ratio; R =
reserves)

↑ r → ↓ in checkable deposits
↓ r → ↑ in checkable deposits
 Why Banks Borrow Reserves

To increase loan making ability

To meet required reserve requirements
 Borrowing Reserves
Call Money Market - A market where
banks lend reserves to one another,
usually for short periods.
Call Money Rate - The interest rate in the
call money market; the interest rate banks
charge one another to borrow reserves.
Bank Rate - The interest rate BB charges
depository institutions that borrow
reserves from it.
BB Monetary Tools and Their Effects
on the Money Supply
 Self-test Questions
 How does the money supply change as a result
of (a) an increase in the discount rate, (b) an
open market purchase, (c) an increase in the
required reserve ratio?
 What is the difference between the federal funds
rate and the discount rate?
 If bank A borrows $10 million from bank B,
what happens to the reserves in bank A? in the
banking system?
 If bank A borrows $10 million from the Fed,
what happens to the reserves in bank A? in the
banking system?