Reserve Requirement
- Only a small percent of your bank deposits is in the safe; the rest of your money has been loaned out; this is called "Fractional Reserve Banking".
- FED sets the amount that banks must hold.
- The reserve ratio is the % of deposits that banks must hold in reserve and not loan out.
- When the FED increases the money supply, it increases the amount of money held in bank deposits.
- Recession- Decrease the Reserve Ratio; Money supply increases, interest rates decrease, Aggregate Demand increases
- Inflation- Increase the Reserve Ratio; Money supply decreases, interest rates increase, Aggregate Demand decreases
Discount Rate
- Interest rate that the FED charges commercial banks
- To increase money supply, FED should decrease the discount rate
- To decrease money supply, FED should increase the discount rate
Open Market Operations
- The FED buys/sells government bonds
- most important and widely used tool monetary policy.
- To increase money supply, FED buys bonds.
- To decrease money supply, FED sells bonds
You should note the complementary fiscal policies in your notes, for example in a easy money policy taxes are reduced and gov't spending is increased while in tight money taxes increase and gov't spending is reduced. Better understanding fiscal helps with monetary policy!!
ReplyDeleteI find your video as a very useful catalyst that can help me(and I am sure, others)accelerate our understanding of the types of economic policies involving the Money supply and the Fed. I found your notes on OMOs very helpful as I did not know that the OMO is the most widely used monetary policy tool. Which leads my to believe that it is the most important because this is where the Fed buys bonds and sells them. Good post buddy.
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