PSC101 Chapter 7

• primary sensory cortex: input from thalamus



• secondary sensory cortex: input from primary sensory cotex or other aras of secondary sensory cortex of same system



• association cortex: receives input from more than one sensory sytem; from secondary sensory cortex



• interactions between the three types of senosry cortex are characterized by three principles: hierachical organization, functional segregation, and parallel processing


• hierachical organization: hierachy; as go up, neurons respond to greater specificity and complexity


• sensation is detection of stim and perception is integrating, recognizing and interpreting stim


• functional segregation: the three levels of cerebral cortex, primary, secondary, and association, in each sensory system contains distinct areas that specialize in different kinds of analysis


• parallel processing: one believed to be in serial: info flow in one pathway; parallel systems: multiple pathways; the simul analysis of a signal in different ways by multiple parallel pathways


• two parallel processing: one influence behavior without our conscious awareness and one with conscious awareness.


• corticofugal pathways: cognitive processes such as attention can influence perception


• scotoma: an area of blindness caused by damage to primary visual cortex


• blindsight: respond to visual stim in scotomas even though have no conscious awareness of stimuli


• subjective contours: see contours that don't exist


• dorsal stream: flow from primary visual cortex to dorsal prestriate cortex to posterior parietal cortex


• ventral stream: from primary visual cortex to ventral prestriate cortex to inferotemporal cortex


• prosopagnosia: visual agnosia for faces


• agnosia: fail to recognize; visual agnosia: cannot recognize objects


• amplitude = loudness; pitch = frequency; complexity = timbre


• sound waves travel down auditory canal and cause tympanic membrane to vibrate --> three ossicles: small cones of middle ear; malleus, incus, and stapes --> vibration of membrane called oval window --> fluid of cochlea --> ogan of corti


• organ of corti: basilar membrane and tectorial lmembrane; hair cells on basilar membrane and tectorial on hair cells; hair cells to auditory nerve


• cochlear coding: different freq produce different stim of hair cells at different points along basilar; higher freq: more activation to the windows


• tonotopic; vesticular: balance


• auditory nerve --> superior olives --> inferior colliculi --> medial geniculate nuclei --> primary auditory cortex


• medial superior olives respond to differences of arrival time from two ears; lateral superior olives: slight diff in amplitude


• both project to superior colliculus and iinferior colliculussomatosensory system: exteroceptive system (senses external stim to skin); proprioceptive system (position of body that comes from receptors in muscles, joints, organs of balance); interoceptive system (conditions in body: temp and bp)


• exteroceptive: mechanical stim (touch); thermal stim (temp); and nociceptive stim (pain)


• dermatomes: area of body that is innervated by the left and right dorsal roots of a given segment of spinal cord


• dorsal-column medial lemniscus (DCML): info on touch and proprioception


• anterolateral: info about pain and temp


• somatosensory homunculus: somatopic map


• somatosensory agnosia: astereognosia: cannot recog objects by touch; asomatognosia: cannot recog parts of one's body; anosognosia: failure to recogn symptoms; contralateral neglect: not respond to half of body


• adaptiveness of pain: important for our survival; responses to excessive stim


• no cortical representation of pain; anterior cingulate cortex


• pain suppressed by cognitive and emotional factors; gate-control theory; corticofugal pathways can blcok pain signals


• olfactory: oflactory muscosa; olfactory bulbs; olfactory tract; amygdala and piriform cortex; medial dorsal neuclei and orbitofrontal cortex


• tastebuds; papillae; tastes is not combination of primaries; some tate act on ion channels and not receptor molecules


• selective attention: perceive only small subset of stim; improves focus; endogenous and exogenous attention (internal cognitive processes or external events); top-down and bottom-up


• change blindness


• the inferotemporal cortex is an area of secondary visual cortex


• the dorsal and ventral streams are part of the visual system


• the primary auditory cortex is tonotopically organized


• the inferior colliculi and medial geniculate nuclei are components of the auditory system


• the dcml and anterolateral system are pathways of the somatosensory sytem


• the ventral posterior nuclei, the intralaminar nuclei, and parafascicular nuclei are all thalmic neuclei of the somatosensory


• the periaqueductal gray and the raphe nuclei are involved in blcoking the perception of pain


• one pathway of the olfacotry system projects from the amygdala and piriform cortex to the orbitofrontal cortex


• parts of the ventral posterior nuclei are thalamic relay nuclei of both soomatosensory and gustatory systems


• unlike the projections of all other sensory sytems, the projections of the gustatory system are primarily ipsilateral.

Chapter 2

• Cartesian dualism: descartes; physical matter and the human mind, soul, spirit


• ethology: study of animal behavior in wild; instinctive behaviors


• fitness: the ability to survive and pass on genes to next generation


• hierachy of social dominance: decreases hostility; dominant: copulate more


• sepcies: reproductively isolated; can only produce offspring by mating with same species (conspecifics)


• chordates: animals with dorsal nerve cords; spinal bones to protect dorsal nerve cord are vertebrae


• amphibians: young in water; adult in land


• reptiles: evolved from amphibians; shell eggs; dry scales; away from water


• mammals: nurture young in watery environment of their bodies


• evolution not in single line


• humans don't have evolutionary supremacy


• evolution does not proceed slowly and gradually


• few products of evolution have survived to present day


• evolution does not progress to perfection


• not all behaviors or structures are adaptive; spandrels: nonadaptive; may once be adaptive but not anymore


• not all adaptive characteristics evolved to perform current function


• similarities among species does not mean common orgins; analogous; convergent evolution


• no relationship between brain size and intelligence; brain size and body size


• brain stem: regulate reflexes such as herat rate, respiration, blood glucose level


• cerebrum: learning, perception, motivation


• human brain has increased in size during evolution; most increase in cerebrum; increase in convolutions: fold on the cerebral surface --> increased volume of cerebral cortex


• promiscuity: mate indiscriminately


• dichotomous traits: in one form or other, not in combo


• true breeding lines: offspring with same traitoperator genes: controls a gene or a group of genes; regulated by dna-binding proteins


• mitochondria: energy producing structures; inherited from mother; mutations develop in mito dna at consistent rate --> evolutionary clockphysiological-or-psychological thinking was given official recognitio in thee 17th century when the roman church sanctioned cartesian dualism


• in darwinian sense, fitness refers to the abaility of an organism to survive and produce large numbers of fertile offspring.


• a species is a group of reproductively isolated organisms.


• mammals are thought to have evolved from reptiles 180 million years ago


• there are five different families of primates: prosmians, new-world monkeys, old-world monkeys, apes, hominids


• chimpanzees are the closest living relatives of humans; they have about 99% of the same genetic material.


• the first hominids were australo


• the degree of linkage between genes is a measure of how close they are together on a chromosome


• each structrual gene contains the info for the production of a single protein


• strutural genes can be turned off or on by operator genes


• the massive international effort to physically map human chromosomes is known as the human genome project.


• ontogeny: development through life span; phylogeny: evolutionary deve of species through ages


• phenylketonuria (PKU): phenylpyruvic acid; lack phenylalanine hydroxylase --> abnormal brain development


• bird songs: sensory phase (memories of adult songs); sensorimotor phase (refined; feedback; crystallized)


• age-limited learners: crystallized ramain unchanged; open-ended learners: can add new songs


• decending motor pathway: from high vocal center on each side of brain to syrinx on the same side; mediates song production


• anterior forebrain pathway: mediates song learning


• left decending motor pathway more important than right; high vocal center is four times larger in male; song-control structures of males double in size during mating season; seasonal increase in size results from growth of new neeurons


• heritability estimate: proportion of variability occuring in a trait in a study that resulted from genetic variation in that study.

Chapter 5

• Schizophrenia symptoms: delusions, hallu, disorganized speech, loss of affect, diminished motivation
• paranoid, catatonic, disorganized
• adolescence or early adult life; same rate in men and women
• genetic disorder; monozygotic twin, 50%; dizygotic and sibling, 5-15%
• chromosomal aberrations:
• drugs that focused on dopamin and serotonin transmission; linkage studies: tendency of genes at specific loci to be inherited together with known markers because of proximity
• may be due to dysfunction of frontal lobe and dorsolateral prefrontal cortex (DLPC)
• Bipolar disorder: manic depressive illness; mood disorders; epi of depression and mania
• bipolar I diorder: depression and one or more manic epi
• Bipolar II disorder: depression and one or more bouts of hypomania
• Autism: pervasive developmental disorder (Rett, childhood disintegrative disorders, Asperger's syndrome); restlessness and distraction, lack of social interaction, difficuty with language, motor behaviors; boys more than girls 3:1; chromosomal abnormalities

Exam 1

1. autocalibration: visual system flexibly adaps; deal with huge info
2. simple cells detec bars of light/dark
3. won nobel prize for orientation selective receptive field organ
4. pinhole camera: doesn't happen when we open blinds; light interferes with itself destroying details
5. eyeball filled with saline
6. lens in water has reduced refractive index
7. swimming; sharpen image: yes, opaque contact lens to eye that has aperture where light pass
8. tc eye; scanning input; pinhole sized: not nautilus, bee, patella, paramoecium
9. types of lens in human eye: convex and converging
10. tubes: fly
11. human iris unique id system
12. rods are more sensitive than cones in scotopic conditions
13. fixate at dim star; not perceive star because we don't perceive blood vessels
14. presented a solid dark field to on-center lgn cell (absence of light that covers the entire rf), cell would fire at its spontaneous level
15. inherent problem with pinhole: not enough light enters
16. photoreceptor has rf that corresponds to single region in real world
17. cell firing: neuron summates epsp and ipsp to determind if there is ap
18. hermann grid illusion: ganglion cells
19. simple cells: sensitive to both orientation and position
20. mri anatomy; fmri function
21. visual rf is specifin region on retina
22. somatosensation: touch
23. there are no rods in focea, some cocnes in periphery, and no photoreceptors in blindspot
24. don't perceive blood vessels in front of photoreceptors: adaptation
25. method measure ap: micro-electrode
26. neuron resting potential; cell's pattern of act.: spontaneous activity
27. size of rf: large to small: complex cells, simple cells, ganglion cells, photoreceptors
28. v1: layout maintains adjacency of retinal points; located in occipital; first stage of visual proc to show orientation selectivity; not true: each eye sends all signals to v1 in oppoisite hemisphere
29. oriented rf: v1
30. white matter in brain: axons; grey matter: soma(body) of neurons
31. lgn in thalamus
32. left visual field crosses over; processed in right hemisphere
33. tonotopy in audtion analogous to retinotopy in visual proc
34. NOT TRUE: lgn cells and simple cells perfer stim in one direction; complex cells and simple cells perffer stim in one direction; endstopped cells and lgn cells perffer stim in one direction; endstopped but not commplex cells prefer stim moving in one direction
35. monkey brain: cortical magnification
36. the image in right eye projects to visual cortex in both hemis
37. red spot, blank white surface: see green spot due to color adaptation

Exam 2

1. prosopagnosia: deficit recogn faces
2. concave face demo: face convexity assump overrules lighting from above assump
3. damge to ffa prosopagnosia
4. damage to ppa impair ability to recogn sitting in a classroom
5. damage to lateral occipital unable to id pad-lock
6. damage to inferotemporal impair recogn parts of objects (basic shapes)
7. horopter: set of all 3d points with zero disparity
8. stereograms: stereopsis occurs at local image points before shape analysis
9. monkey neuron red pepper: lips; located in inferotemporal cortex
10. visual system measures the light, infers the intensity, to estimate the reflectance
11. kid appear big because depth cues like persepctive ocerrule object knowledge
12. accomodation is depth cue based on lens thickness
13. cells in v2 that have rf to modal completion
14. paper white under med illum; still looks white under bright illum: because visual system discounts illuminant
15. dark gray square brighter when falls under shadow because of: NOT BECAUSE OF: lightness multiplication, lightness freq, reflectance constancy, intensity multiplication
16. xjunctions: shadows
17. heuristics visual makes when interp retinal images: lighting direction: not surface contours, surface texture, object shape
18. true: reflections can be wrong shape
19. false: refelctions must be right color
20. true: refelctions can be of wrong scene
21. false: ref can be wrong lightness
22. true: ref must appear to follow surface on which they fall
23. false: shadows can appear to have volume
24. false: people notice shadows in paintings are wrong direction
25. false: people notice impossible shadows
26. false: shadows must be consistent with lighting in scene
27. true: shadows help determine depth
28. true: shadows must be darker than surround
29. false: shadows can have different texture than surround
30. false: combining top half of face with bottom half of another face familiar and easy to id
31. true: evidence that faces are processed holistically
32. false: perception of scene depth requ focuses attention
33. amodal completion happens more often in real scenes than modal completion
34. damage to ventral stream: not id object but could mimic actions req to use object
35. surfaces: mid level vision
36. emmert's law does not demo: distance constancy; lightness cons; object cons; position cons
37. convergence: depth cue; angle that eyes are pointing
38. t junction: occlusion
39. grandmother coding: single cell code individ people
40. obejct that owns shared border is in front
41. one paper lies on top of another; cue tells you which is above: occlusion
42. peephole in ames room: interpret depth: linear perspective
43. size: linear perspective
44. object hover when missing: shadow
45. determine surfaces: gestalt laws of grouping
46. objects get fuzzier in more distant: atmospheric persepctive
47. ball hovers along ground can float in air by changing: shadows
48. strongest cue in Trompe paintings (stim depth in walls or celings) is NOT: height in field, known size, Atmospheric pers, shadows
49. CK and paulette: double dissociation between face and object processing
50. car a and b have same retinal image; a further; a is much larger than b
51. neuron that perfers disparity has rf that are differentially separated from foveas in two eyes

Exam 3

1. method to test how fast we can detect objects is visual search
2. fmri motion aftereffect in MT
3. color and motion afftereffects share this principle: opponent coding
4. phantom hand; touch face feel hand because remapping
5. attend to more things; perceive less detail
6. inaatentional blindness suggests that while driving a cell phone is more dang when in heated debate
7. ganglion cells found that code: R+G-; R-G+;B+Y- but not R+G+
8. motion perceived before shape analysis: kinematograms
9. perferred spped of Reichardt detector depends on delay and distance between rf
10. warp speed (flying through space) stim: expansionary optic flow
11. appears most blue under illum: none
12. black outline is source of illum that causes perception simulating damage to V4/V8
13. simulate motion blindness; none of living in a world illum by fluorescent light; adapting to motion for a long time; illum world with sodium light; living in movie theatre
14. illum x reflectance hits our eye
15. false: trichromacy in ganglion cells
16. true: tv work by color addition
17. false: visual system makes use of color subtraction
18. false: not possible to grow up normally if you lose half brain at 2
19. true: most humans have 3 cone photoreceptors
20. false: opponent process theory req extra yellow photoreceptor
21. false: green and blue are paired in opponent fashion accor to opponent process theory
22. false: color aftereffects are evidence for trichromatic color vision
23. false: perceived color is best desc by trichrmatic alone
24. true: adapting to green, see red
25. false: adapting to blue see red
26. true: adding various mounts of red, green, blue lights can match any perceived color
27. false: color is an invertible code
28. false: poinillist painters used color subtraction
29. true: two different spectra can appear the same
30. false: there are no such things as metamers when you are color blind
31. true: children lose sight are better to localize sounds than sighted individ
32. true: adults how lose sight are better able to localize sounds than sighted individ
33. ganglion cells code opponent colors
34. sometimes whatyou hear depends on what you see: McGurk effect
35. ventriloquest effect is most prominent when watching tv
36. driving; motion on retina corres to world moving around; make a turn, motion changes; change in heading signaled by MST
37. true: neglect happens in visual imagery too
38. true: don't attend to object, disappear from visibility
39. false: cahnge blindness and multiple object tracking both show that we are aware of only one thing at a time
40. true: phantom limbs provide evidence for plasiticity
41. modern correlate of helmholtz trichromacy is cone photoreceptors
42. attention is limited in space and time and number
43. mirror box helps patients with phantom pain
44. true: complex properties (sideways 2 and baldness) are not available preattentively
45. true: attention can move independently of eyes
46. false: attention usually moves independently of eyes
47. multiple object tracking task reveals pro of attentional capacity
48. line bisection and drawing clock face are two tests to measure neglect
49. perceiving only one object at a time is ex of balint's syndrome
50. v1 responds to component but not pattern motion; MT/MST responds to pattern motion
51. motion aftereffect that you see after adapting to contracting pattern (look away and see expansion indicates that low level motion system exists
52. areas of brain might blind braille readers use to read with precision: V1
53. color blind painter could not imagine color, perceive color
54. "what are you sinking about" is exm of understanding lang requires knowledge of context.

Chapter 16: What shouldd central banks do? Monetary policy goals, strategy and tactics

The price stability goal and the nominal anchor
-price stability: low and stable inflation; high inflation = lower economic growth; creates uncertainty

1. The role of a nominal anchor
-a nominal variable such as inflation rate or the money supply ties down price level to achieve price stability; adherence to nominal anchor promotes low inflation
-limits time-inconsistency problem

2. The time-inconsistency problem
-tempted to pursue discretionary monetary policy that is more expansionary than expected becauses boost economic output in the short run
-best policy is not to purue expansionary policy because decisions about wages and prices relect workers' and firms' expectations about policy; when they see an expansionary policy, they expect inflation driving wages and prices up --> higher inflation but not higher output
-best policy is to keep inflation under control
-nominal anchor is a behavior rule; prevent the time-inconsistency problem in monetary policy by providing an expected constraint on discretionary policy.;

Other goals of monetary policy
1. Higher employment: the alternative situation: high unemployment causes misery; high ue = idle workers and resources = loss of output
-frictional ue: searches to find suitable matchups; beneficial to economy
-structural ue: mismatch between job requirements and skills or availability of local workers; undesirable
-natural rate of ue: demand for labor equals the supply of labor

2. Economic growth
-related to high employment;encouraging firms to invest or encouraging people to save
-supply-side economics polcies: intended to spur economic growth by tax incentives for businesses to invest and for taxpayers to save.

3. Stability of financial markets

4. Interest rate stability
-fluct can create uncertainty
-reduce upward movements: generate hostility toward central banks and lead to demands that their power be curtailed
-increase in interest rate: large capital losses on long-term bonds and mortgages

5. Stability in foreign exchange markets
-rise in value eof dollar makes american industries less competitive; declines in value stimulate inflation in us.

Should price stability be the primary goal of monetary policy?
1. in long-run, no trade-off between price stability and other goals
-short run price stability conflicts with goals of high employment and interest-rate stability

2. Hierachical vs. dual mandates
-hierachical mandates: primary goal is price stability then other goals
dual mandate: price stability and max employment
-price stability should be the primary, long-run goal of monetary policy

Monetary targeting
1. central bank announces certain vaule of annual growth rate of a monetary agggregate such as 5% growth rate of M1 or 6% growth rate of m2.
2. US: kept missing target
-shocks that made monetary aggregates control difficult
-smokescreen: free to manipulate interest rates to dampen inflation; won't be blame for high interest rates
no longer use monetary aggregates as guide for monetary policy

3. Germany: success
-focus on narrow monetary aggregate called central bank money: sum of currency in circulation and bank deposits
-more transparent to the public; not rigid; more accountable

4. Advantages of monetary targetiing
-info on whether central bank is achieving its target is known immediately; fix inflation expectations and produce less inflation
-allow immediate accountability for monetary policy to keep inflation low --> help precent from falling into the time-inconsistency trap

5. Disadvantage sof monetary targeting
-there must be strong and reliable relationship between goal variable (inflation or nominal income) and the targeted monetary aggregate

Inflation targeting
1. public announcement of medium-term numerical targets for inflation;
-an institutional commitment to price stability as the primary, long-run goal of monetary policy and a commitment to achieve the inflation goal;
-an information-inclusive approach in which many variables (not just monetary aggregates) are used in making decisions about monetary policy;
-increased transpareny of monetary policy strategy through communication with the public and the markets about the plans and objectives of monetary policymakers;
-increased accountability of the central bank for attaining its inflation objectives

2. New Zealand was first to adoptt inflation targeting
3. Canada: inflation dropped but ue soared
4. UK: inflation fell and there was growth and reduction in ue

Advantages of inflation targeting
1. does not rely on relationship of money and inflation
2. can use all information and not just one variable
3. understood by public and highly transparent
4. increase accountability of central bank; prevent time-inconsistency trap

Disadvantages
1. delayed signaling; too much rigidity; potential for increased output fluctuations; and low economic growth
2. delayed signaling: inflation not easily controlled; unable to send immediate signals to public
3. too much rigidity: limits ability to respond to unforseen circumstances
-flexible inflation targeting in practice
4. potential for increased output fluctuations: does not require sole focus on inflation
-choose inflation targets above 0 to prevent deflation; concerned about output and ue too.

Chapter 15: Tools of Monetary Policy

The market for resesrves and the federal funds rate

Supply and Demand in the market for reserves
1. Demand curve: quantity of excess reserves demanded = required reserves + quantity of excess reserves demanded
-excess reserves are insurance against deposit outflow and the cost of holding er is the interest rate that could have been earned on lending it out which is the federal funds rate.
-fund funds rate decreases --> cost of holding er falls --> quan of reserves rises

2. Supply curve:
-two components: amount of reserves supplied by fed's open market operations called nonborrowed reserves; and the amount of reserves borrowed from the fed, the borrowed reserves
-cost of borrowing from fed is the interest rate fed charges on these loans, the discount rate (id)
-bowworing from other banks at the fed funds rate; as long as iff is less than id, banks will not borrow from fed; vertical line until id

How changes in the tools of monetary policy affect the federal funds rate
1. open market operations: an open market purchase causes the fed funds rate to fall, whereas an open market sale causes the fed funds rate to rise
-open market purchase leads to greater quan of reservess supplied; shirts the sc to the right

2. discount lending: effect depends on whether dc intersects the supply curve in its vertical section or flat section
-when intersect at vertical section - most changes int eh discount rate have no effect on the fed runds rate
-intersect at flat section; some discount lending; iff moves with id

3. reserve requirements: when required reserve ratio increases, quan of resreves demanded increases for any given interest rate --> shift demand curve to the right --> raises the fed funds rate
-when the fed raises reserve requirements, the fed funds rate rises

Open market operations (t-bills)
-most useful monetary policy tool; primary determinants of changes in interest rates and monetary base --> change in money supply
-open market purchases expand reserves and monetary base and money supply lowering short-term interest rates
-open market sales shrink reserves and monetary base decreasing money supply and increasing short-term interest rates.
-two types of open market operations: dynamic open market operations: change the level of reserves and monetary base
-defensive omo: offset movements in other factors that affect reserves and the monetary base
-repurchase agreement: fed purchases securities with an agreement that the seller will repurchase them; temp open market purchase
-matched sale-purchase transaction (reverse repo): temp open market sale; fed sells securities and buyer agrees to sell them back to fed

Advantages of open market operations
1. fed has complete control over it
2. flexible, precise and used to any extent
3. easily reversed
4. implemented quickly; no administrative delays

Operation of the discount window
1. three types of discount loans:
a. primary credit: most important; healthy banks allowed to borrow all they want for short maturities --> standing lending facility
-lent at discountr ate which is 100 basis points (1%) higher than fed funds rate
b. secondary credit: banks taht are in financial trouble and experiencing severe liquidity problems
-interest set at 50 basis points above the discount rate
c. seasonal credit: small banks in vacation and agricultural areas that ahve seasonal pattern of deposits
-interest rate is average of fed funds rate and certificate of deposit rates

Lender of last resort
1. fed as lender of last resort to prevent bank panics
2. moral hazard problems

Advantages and disadvantages of discount policy
1. ad: lender of last resort
2. dis: decisions to take out discount loans are made by banks and are not controlled by the fed

Reserve requirements
-affect money supply by changing money supply multiplier
-rise in reserve requirements reduces the amount of deposits that can be supported by level of monetary base and lead to contraction of ms.
-rise in rr also increases the demand for reserves and raises the fed funds rate
1. disadvantages of reserve requirements
-no longer binding for most banks
-raising requirements can cause immediate liquidity problems for banks where reserve requirements are binding; create more uncertainty for banks

Application: Why have reserve requirements been declining worldwide?
-makes banks less competitive

ApplicationThe channel/corridor system for setting interest rates used in other countries
-central banks ets up a standing lending facility; commonly called a lombard facility; interest rate charged is called lombard rate
-overnight interest rate is always between ir and il

Monetary policy tools of the european central bank
1. set target financing rate which sets target for overnight cash rate
2. Open market operations: main refinancing operations are predominant form of open market operations and are similar to the fed's repo; they involve weekly reverse transactions
-longer-term refnancing operations: similar to fed's outright purchases or sales

3. lending to banks: marginal lending facility; borrow overnight loans from national central banks at the marginal lending rate which is 100 basis points above target financing rate; similar to discount rate; ceiling
-deposit facility: banks are paid fixed interest rate that is 100 basis points below target financing rate; floor for overnight market interest rate

4. Reserve requirements: pays interest on required reserves

Chapter 14: Determinants of the Money Supply

The money supply model and the money multiplier
1. fed can control monetary base better than reserves: money supply = money multiplier X monetary base
2. desired level of currency and excess reserves grow proportionally with checkable deposits
-currency ratio = currency/deposit
-excess reserves ratio = excess reserves/deposits
-total reserves = required reserves + excess reserves
-required reserves = required reserve ratio X deposits
-R=(rXD) + ER
-MB = R + C = (rXD) + ER + C ; the amount of monetary base needed to support the existing amounts of checkable deposits, currency, and excess reserves
-an increase in the monetary base that goes into currency is not multiplied, whereas an increase that goes into supporting deposits is multiplied
-MB = (r X D) + (e X D) + (c X D) = (r + e + c) X D ; D = [1/(r + e +c) ] X MB
-M = [(1+c)/(r+c+e)] X MB ; currency ratio set by depositors, excess reserves ratio set by banks, and required reserve ratio set by Fed
-money multiplier is less than teh simple deposit multiplier; although there is multiple expansion deposits, there is no such expansion for currency

Factors that determine the money multiplier
1. the money multiplier and money supply are negatively related to the required reserve ratio
2. the money multiplier and money supply are negatively related to the currency ratio
3. negatively related to the excess reserves ratio
4. banking system's excess reserves ratio is negatively related to the market interest rate; as market interest rate increases, the expected return on loans and securities rises relative to the zero return on excess reserves and the excess reserves ratio falls
5. excess reserves ratio is positively related to expectedd deposit outflows

Additional factors that determine money supply
1. monetary base into two components: one that the Fed can control and one that it can't
-less tightly controlled is the amount of the base that is created by discount loans (borrowed reserves)
- the tightly controlled is the nonborrowed monetary base which results from open market operations
-(nonborrowed monetary base) = (monetary base) + (borrowed reserves from the Fed
-M = m X (MBn + BR)
-money supply is positively related to the nonborrowed monetary base
-money supply is positively related to the level of borrowed reserves fromt eh fed

Application: movements in money supply
1. over long periods, the primary determinant of movements in the money supply is the nonborrowed monetary base which controlled by fed open market operations

Application: bank panics
1. cause substantial reduction in the money supply by increasing in c and e.

Chapter 13: Multiple Deposit Creation and the Money Supply Process

Multiple deposit creation: a simple model
1. when fed supplies banking system with $1 of additional reserves, deposits increase by a multiple of this amount

Deposit creation: The banking system
1. A bank cannot safely make loans for an amount greater than the excess reserves it has before it makes the loan
2. whether a bank chooses to use its excess reserves to make loans or to purchase securities, the effect on deposit expansion is the same
3. multiple increase in deposits generated from an increase in the banking system's reserves is called the simple deposit multiplier: (change in checkable deposits in the banking system) = (required reserve ratio)(change in reserves for the banking system)
4. Critique: fed has no complete control over the level of checkable deposits

Chapter 12: Structure of Central Banks and the Federal Reserve System

Structure of the Federal Reserve System
1. Diffusion of power: the Fed Reserve banks, Board of Governors of the Federal Reserve System, Federal Open Market Comittee (FOMC), Fed Advisory Council and member commercial banks.
2. Federal Reserve Banks: for 12 district; largest are New York, Chicago, and SF
-quasi-public (part private, part government)
-each with nine directors who appoint president and other officers of the FRB
-The twleve Fed Reserve banks perform the following functions:
a. clear checks, issue new currency, withdraw damaged currency, administer and make discount loans to banks, evaluate mergers, liaisons between the business communitry and FRS, examine bank holding companies and state-chartered member banks, collect data, use staffs of prof economists to research topics related to monetary policy.
-Involved in monetary policy:
a. establish discount rate; which banks can obtain discount loans; directors select banker to serve on Fed Advisory Council; 5 of 12 presidents have vote in the FOMC
3. Special role of the FRB of NY
-contains many large banks in the US; bond and foreign exchange markets; only FRB to be a member of the Bank for International Settlements (BIS); president is the only permanent member of FOMC serving as vice-chairman of the committee.

Member Banks
1. all national banks are members of Fed Reserve System; required all banks to have required reserves; all banks can borrow from fed

Board of Governors of the Fed Reserve System
1. seven members, including the chairman, appointed by the president of the US and confirmed by the Senate
2. head of the fed; monetary policy; FOMC; set reserve requirements; control discount rate; mergers; bank holding companies; supervises the activities of foreign banks in US

Federal Open Market Committee
1. influence money supply and interest rates
2. open market operations

The FOMC Meeting, Why the Chairman of the Board of Governors Really Runs the Show

How Independent is the Fed?
1. instrument iindependence: the ability of the central bank to set monetary policy instruments
2. Goal independence: the ability of central bank to set the goals of monetary policy
3. The fed has both types of independence
4. factor that contribue to independence: income from Fed
5. Congress can change fed structure; president can appoint governors

Structure and Independence of the European Central Bank
1. conducts monetary policy for countries that are members of the European Monetary Union
2. The central banks for each country has similar role to that of the Federal Reserve Banks

Differences Between the European System of Central Banks and the Federal Reserve System
1. budgets of fed controlled by board of governors, while national central banks control their own budgets and the budget of the ECB in Frankfurt; ECB has less power than does the BoG
2. monetary operations of teh ECB are conducted by the NCB in each country so monetary operations are not centralized as Fed.
3. ECB not involved in supervision and regulation of financial institutions

Governing Council
1. concensus but no votes; fed releases statement of fomc; ECB have news conference

How independent is the ECB?
1. most independent central bank in the world; long-term goal is price stability
2. ecb's charter cannot be changed by legislation

Structure and independence of other foreign central banks
1. Bank of Canada
-gave monetary policy to the government; on paper, BoC is not as instrument-independent as the fed.; in practice, does control monetary policy
-goal for monetary policy, a target for inflation, is set jointly by the bank of canada an the government so the bank of canada has less goal independence than the fed.

2. Bank of England
-least independent of the central banks because the decision to raise or lower interest rates is controlled by the chancellor
-makes it monetary policy independently from the ECB.
-inflation target is set by chancellor so less goal-independent than fed

3. Bank of Japan
-price stability, granted greater instrument and goal independence
-Ministry of Finance has control over budget --> limit independence

4. The trend toward greater independence
-greater independence produce better monetary policy

Explaining central bank behavior
1. factor affecting central bank behavior is its attempt to increase its power and prestige
2. fed maintain autonomy; avoid conflict with powerful groups
3. hide actions from public and politicians to avoid conflicts with them

Should the fed be independent?
1. favor
-inflationary bias to monetary policy; politicians are short-sighted; politically insulated fed is more likely to be concerned with long-run objectives
-political business cycle: just before election, expansionary policies are pursued to lower unemployment and interest rates.

2. against
-undemocratic to have monetary policy controlled by elite troup that is responsible to no one.; lack of accountability; only by placing monetary policy under the control of politicians who also control fiscal policy can these two policies be prevented from working at cross-purposes.
-fed has not always used its greedom sucessfully.