Tools of Monetary Policy

Tools Of Monetary Policy

FED adjusts money supply by changing 1 of the following….

1. Setting reserve requirements
2. Lending money to banks and thrifts
1. Discount rate
3. Open Market Operations
1. Buying and selling bonds

1. Reserve Requirement
1. Fed sets amount that bank must hold (fractional reserve banking).
2. RR ration is % of deposits banks must hold in reserve (can NOT loan out)
2. Open Market Operations
1. If the Fed buys bonds- it takes bonds out of the economy and replaces them with money. MS increases.
2. Most important and widely used monetary policy
3. To increase MS, Fed should buy govt securities
4. To decrease money supply, fed should sell govt securities
3. Discount Rate
1. Interest rate that the Fed charges commercial banks for short term loans.