I. Reserve requirement
-only a small percent of your deposit is in the safe. The rest of your money has been loaned out.
-The FED sets the amount that banks must hold.
-The reserve requirement is the % of deposits that banks must hold in reserve and not loan out.
- If there's a recession we should decrease reserve ratio.
-banks create more money by loaning out excess
-money supply increases interest rates fall, AD goes up
2. If there's inflation increase in RR
-banks hold more money and have less ER
-banks create less money
-money supply decreases, interest rates goes up, AD goes down
II. Discount rate
-the interest rate that the FED charges commercial banks.
-To increase the MS, the FED should decrease the discount rate.
- To decrease the MS, the FED should increase the discount rate.
III. Open market operations
-The FED buys/sells government bonds (securities)
- This is the most important and widely used monetary policy.
-To increase the MS, the FED should buy government securities.
- To decrease the MS, the FED should sell government securities.
Your notes over the three tools of monetary policy is very informative. You should separate the Expansionary and Contractionary policy so that we can have a clear picture of what's really happening. But did you also know that expansionary is called easy money and Contractionary is also called easy money?
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