Unit 4: Montary Policy

Monetary Policy:

Expansionary
  •  Used to fight a recession
    • OMO=Fed buys bonds; MS↑
    • Required Reserves (RR)=↓
    • Discount rate (DR)=↓
    •  Federal Funds Rate(FFR)=↓
Contractionary
  • Used to fight inflation 
    • OMO=Fed sells bonds;MS↓
    • Required Reserves (RR)=↑
    • Discount rate (DR)=↑
    •  Federal Funds Rate(FFR)=↑
Sell bonds = money supply decrease
Buy bonds = increase on money supply
  •  Open Market Operations
    • Fed can buy bonds = MS ↑
    • Fed can sell bonds =MS ↓
  • Discount Rate
    • FDIC member banks and other eligible institutions may borrow short term loans directly from the Federal Reserve
  • Reserve Requirement
    • Banks must keep this certain amount in vault
  • Federal Funds Rate
    • FDIC member banks loan each other overnight funds
Bank borrow from FED = Discount rate
Bank borrow from other banks = Federal Funds Rate

  • Prime Rate
    •  Interest rate that banks charge to their most credit worth customers
  • Single Bank 
    • Can create money through loans by the amount of it excess reserves 
  • Banking System 
    • Can create  money by a multiple of the initial excess reserves 








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