Chapter 13: The Federal Reserve System

Open Market Operations

The buying and selling of government securities by the Fed

Recession need to do:

Increase money supply, interest rates will go down, investment will go up, aggregate demand will go up

The Three Tools for fixing a Recession

Reserve Requirements down

Discount Rates down

OMO: Buy Bonds

Inflationary Gap need to do:

Decrease money supply, interest rates will go up, investment will go down, aggregate demand will go down

The Three Tools for fixing an Inflationary Gap

Reserve Requirements up

Discount Rates up

OMO: Sell bonds

When a bank is reserve deficient it can:

Get loans from another bank

Get loans from the Fed

Apply some of its loan repayments

The two major places a bank can go to acquire a loan

The federal funds market or the Fed

Monetary Policy

Changes in the money supply or in the rate of change of the money supply, intended to achieve stated macroeconomic goals

discount rate

The interest rate on the loans that the Fed makes to banks

federal funds rate

Interest rate banks charge each other for loans

money multiplier

1/reserve ratio

Federal Open Market Committee (FOMC)

Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply