UNIT 4- 3/31/17

3/31/17

• Tools of monetary policy and three shifters of money supply:
• The Fed adjusting the supply by changing any one of the following:
• Setting reserve requirements
• Lending money to banks and thrifts (discount rate)
• Open market operations (buying and selling bonds)
• The reserve requirements
• The Fed sets the amount the banks must hold
• The RRR is the percent of deposits that the banks must hold in reserves
• Bank deposits – when someone, public or private, deposits money in the bank
• There is a recession what should the FED do to the reserve requirement? It should decrease the reserve ratio
• If there is inflammation, increase RR
• Open market operation
• When the Fed buys or sells government bonds
• Most important and widely used monetary policy
• If the Fed buys bonds it takes bonds out of the economy and replaces them with money
• If the Fed sells bonds it takes money and gives the security to the investor
• To increase money supply the fed should buy government securities
• To decrease money supply the fed should sell government securities
• The discount rate:
• The interest rate that the Fed charges commercial banks for short term loans
• The DR is generally not used by the Fed to effect monetary policy. This is not the rate you hear about in the news

monetary policy:                    expansionary policy         contractionary policy
open market operation:                buy bonds                          sell bonds
reserve requirement:                    decrease                            increase
discount rate:                              decrease                            increase