3 Tool of Monetary Policy
The Required Reserve
- The RR : Only a small percent of your bank deposit is in the safe.
- The fed set the amount that bank must hold.
- When the FED increase the money supply it increase the amount of money held in the bank deposit.
- If there is in a recession, what should the FED do to the resserve requirement?
- Decrease in the RR
- MS increase, interest rate decrease, AD increase
- If there is inflation, what should the FED do to the reserve requirement?
- Increase in the RR
- MS decrease, interest rate Increase, AD decrease
The Discount Rate
- The discount rate is the interest rate that the FED charge commercial banks.
- EX : If bank of America need $10 million, the borrow it from the U.S. Treasury (which the FED controls) but they must pay it back with interest.
- To increase the money supply, the FED should Decrease the discount rate (Easy money)
The open market Operations
- The FED buys & sells government bonds (securities)
- To increase the money supply, the FED should buy bond.
- To decrease the money supply, the FED should sell bond.
- Federal Fund Rate : The rate at which member of bank loan each order over night loan.
- prime Rate : Interest that bank gives to there most credit wordy customer.
- When a customer deposit cash or withdraws cash from there deposit account, it has no immediate effect on money supply.
- Single Bank - loan money from Excess reserve
- Banking System - ER * MM = Total money supply
- It only changes- The Composition of the money, Excess Reserve, and Required Reserve.
- When the FED buys or sells bonds, ER is credited.