Monetary Policy

the structure of the fed

board of governors, 12 regional reserve banks

Federal open mark committee

both the governors and the federal reserve bank presidents

Duties of the fed

supervise financial institutions, lender of las resort, issue currency

The Fed’s 3 main tools to conduct monetary policy

Use open market operations, change the reserve requirement, change the discount rate

open market operations

primary to change the amount of money in the economy, fed is buying and selling government bonds in the open market (to expand = buy bonds) (to decrease = sells bonds)

What happens when banks loan out excess reserves

they money supply increases via the money multiplier

what happens when the fed sells bonds

the banks reserves are reduced and banks loan out less money (contractionary monetary policy)

How can the fed increase the money supply by the reserve requirement

decreasing the reserve requirement, which increases the money multiplier

How can the fed decrease the money supply

increasing the reserve requirement, which decreases the money multiplier

what is the discount rate

is the interest rate the fed charges for loans it makes to banks

What does an increase in the discount rate do

makes it more expensive to borrow from the fed, decreasing money supply

Banks with surplus reserves…

can lend them to banks with a reserve shortage in the “fed funds” market

What is the fed funds rate

the average interest rate banks charge each other for fed funds

Monetary policy shifts which curve?

the AD curve because the change impacts I (investment)

How much does the AD curve shift

by the multiplier * change in I ex. expansionary monetary policy shift the AD curve to the right

liquidity trap

a situation where interest rates are close to zero, conventional policy tools become ineffective