Last Monday we took a look at the two charts below of the Monetary Base and Excess Reserves. We discussed how the central bank bleeds reserves into the system as needed to maintain its target federal funds rate. We also looked at the three ways in which the quantity of reserves in the banking system can change.
Up until the point that QE was introduced, there were never any excess reserves in the system, yet if you notice, the monetary base kept slowly increasing. Why is that? During this period, as the population and the economy continued to grow, the quantity of money needed to support the growth in goods and services also had to grow.
When the amount of goods and services in an economy increases, as it typically does over time, the amount of money representing those goods and services must grow as well. If it doesn't, we experience ... Log in or subscribe to continue reading.
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