21 March 2016 (Unit 4)

3 Tool of Monetary Policy

The Required Reserve

1. The RR : Only a small percent of your bank deposit is in the safe.
1. The fed set the amount that bank must hold.
1. When the FED increase the money supply it increase the amount of money held in the bank deposit.
2. If there is in a recession, what should the FED do to the resserve requirement?
1. Decrease in the RR
2. MS increase, interest rate decrease, AD increase

1. If there is inflation, what should the FED do to the reserve requirement?
1. Increase in the RR
2. 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.