Macroeconomics, 2nd Edition by Pearson

SAVINGS, THE BALANCE OF PAYMENTS, AND THE MONEY SUPPLY

55

An alternative way of increasing the monetary base is by reducing the

discount rate on borrowed reserves or advances to

i

′

CB

[Figure 2.7(b)]. This

induces banks to increase their holdings of excess reserves and the increased

bank reserves produce a rise in the monetary base.

The inter-bank market provides continuing information on the relation-

ship between the demand for reserves and their availability in the banking

system. Commercial banks bid for funds in the inter-bank market if they are

short and lend funds there if a long position is building up. The inter-bank