Unit 4: Tools of monetary policy 3/30/17

The Fed adjusting the MS by changing any of the following:
1. Setting Reserve Requirements
2. Lending money to banks & thrifts
   -Discount Rate
3. Open Market Operations
   -Buying & Selling bonds

#1 The Reserve Requirement:
-The Fed sets the amount that banks must hold.
-The Reserve Requirement (reserve ratio) is the percent of deposits that banks must hold in reserve (the % they can not loan out)
Using Reserve Requirement:
1. If there is a recession, what should the Fed do to the Reserve Requirement?
   -Decrease the Reserve Ratio
   -RR dec./MS inc./i (interest rate) dec./I (inflation) inc./AD inc.
2. If there is inflation, what should the Fed do to the reserve requirement?
   -Increase the Reserve Ratio
   -RR inc./MS dec./i inc./I dec./AD dec.

#2 Open Market Operations:
-Open market operations is when the Fed buys or sells government bonds (services)
-Most important & widely used monetary policy
-If the Fed buys bonds- it takes bonds out of the economy & replaces them with money. MS inc.
-If the Fed sells bonds- it takes money & gives the security to the investor. MS dec.

#3 The Discount Rate:
-There are money different interest rates, but they tend to all rise & fall together.
-The Discount Rate is the interest rate that the Fed charges commercial banks for short term loans.

Tools of Monetary Policy

Monetary Policy                                 Expansionary Policy                            Contractionary Policy

Open Market Operation                              Buy Bonds                                              Sell Bonds
Reserve Requirement                                        dec.                                                          inc.
Discount Rate                                                    dec.                                                          inc.
Bank Reserves                                                   inc.                                                          dec.
Money Supply                                                   inc.                                                          dec.
Federal Fund Rate                                             dec.                                                          inc. 

LINK:
https://courses.lumenlearning.com/macroeconomics/chapter/tools-of-monetary-policy/