Unit 4: Tools of Monetary Policy

4/3/17

1.  Open market operation -  when the Fed buys or sells government bonds, this is the most important and widely use monetary policy
-  if the Fed buys bonds out of the economy and replaces it with money MS increases
-  if the Fed sells bonds it takes money and give security to the investors therefore MS decreases

2.  Reserve requirement -  Dollar amount that must be kept back

• The Fed sets of the amount in the bank must hold
•  The loan eventually become still posits for another bank that will loan out their excess reserves
• - if there is a recession, what should the fat Jew to the reserve requirement ?

•  decrease the reserve ratio ,  Banks hold less money and have more excess reserves, banks create money by loaning out excess reserves, money supply increases, interest rates fall, AD goes up
•   and if there is an inflation ?
•  increase the reserve ratio -  Bank equals more money less excess reserves, creates less money, MS decreases, Ir increases, AD decreases

3.  The discount rate 
-  there are many different interest rates, but they tend to all  rise and fall together
-  The discount rate is the interest rate that the Fed places
-  The federal funds rate is the interest rate that banks charge one another for overnight loans
-  The prime rate is the interest rate that banks charge their most credit worthy customers

4/04/17
Loanable  funds market 
- The private sector supply and demand loans
-  this market bring some gather those who want to lend money and those who want to borrow
-  this market shows the effect on the real interest rate
-  demand -  inverse relationships between real interest rate and quantity loans demanded

I

-  supply -  Direct locations to between real interest rate and quantity loan supplied

Here's a video discussing monetary policy and more!