Transcript Monetary Policy

Federal Reserve System
Board of Governors
7 members
14 yrs. terms
Fed. Open Market Comm.
Federal Advisory Committe
Bd. of Governors and
5 District Reps.
12 members
1 from each district bank
Monetary Policy
Actions by the Federal
Reserve to change the Money
Supply and influence interest
rates on consumer and
business loans.
Three Tools of Monetary Policy

Reserve Requirement Ratios (RRR)

Discount Rate and Federal Funds Rate

Open Market Operations
Reserve Requirement Ratio
Increases or Decreases in the percentage
of deposits that banks must keep in reserve
In times of Inflation, the Fed will raise RRR to decrease
the money supply. Interest rates will increase.
Consumers and businesses will borrow less. (Tight Policy)
In times of unemployment/recession, the Fed will lower
RRR to increase the money supply. Interest rates will
decrease leading to more consumer and business
borrowing. (Easy Policy)
Discount Rate and Federal
Funds Rate
Discount Rate: The interest rate charged
by the Fed for borrowing from the Fed
by banks.
Federal Funds Rate: Interest Rate set by
the Fed for banks to borrow from other
banks.
Open Market Operations
Buying and selling of
government bonds
During times of inflation, the Fed sells more gov’t bonds,
reducing the Money Supply and increasing interest
rates.(Tight Policy)
During times of recession/unemployment, the Fed buys
bonds back, increasing the Money Supply and reducing
interest rates. (Easy Policy)
Example of the Money Market
Sm1
Sm2
Sm3
10
Real rate of
interest, i 8
(Percent)
6
Dm
0
$125
$150
$175
Amount of money demanded and supplied
(billions of dollars)