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UCONN / Economics / ECON 1202 / What are the 3 tools of monetary policy used by the fed to change the

What are the 3 tools of monetary policy used by the fed to change the

What are the 3 tools of monetary policy used by the fed to change the

Description

School: University of Connecticut
Department: Economics
Course: Principles of Macroeconomics
Professor: Stephen antoinetti
Term: Fall 2015
Tags: required reserve ration, the discount rate policy, open market operations, money market, federal reserve, and the monetary sector, Economics, Macro, and Macroeconomics
Cost: 25
Name: Econ 1202 Week 10
Description: These notes cover the required reserve ration, the discount rate policy, open market operations, the money market, the federal reserve, and the monetary sector.
Uploaded: 01/15/2016
4 Pages 197 Views 0 Unlocks
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"}ol.lst-kix_y5dsvpnfv7v-4{list-style-type:none}.lst-kix_v2stjg4p63af-6 > li:before{content:"● "}ol.lst-kix_y5dsvpnfv7v-3{list-style-type:none}ol.lst-kix_y5dsvpnfv7v-6{list-style-type:none}ol.lst-kix_y5dsvpnfv7v-5{list-style-type:none}ol.lst-kix_y5dsvpnfv7v-0{list-style-type:none}.lst-kix_v2stjg4p63af-4 > li:before{content:"○ "}.lst-kix_rqewq8aqps-2 > li{counter-increment:lst-ctn-kix_rqewq8aqps-2}ol.lst-kix_y5dsvpnfv7v-2{list-style-type:none}ol.lst-kix_y5dsvpnfv7v-1{list-style-type:none}.lst-kix_rqewq8aqps-0 > li:before{content:"" counter(lst-ctn-kix_rqewq8aqps-0,decimal) ". "}.lst-kix_rqewq8aqps-2 > li:before{content:"" counter(lst-ctn-kix_rqewq8aqps-2,lower-roman) ". "}.lst-kix_9vs8e8c3zi1a-1 > li:before{content:"" counter(lst-ctn-kix_9vs8e8c3zi1a-1,lower-latin) ") "}.lst-kix_39m3fshxk7uj-7 > li:before{content:"○ "}.lst-kix_y5dsvpnfv7v-4 > li{counter-increment:lst-ctn-kix_y5dsvpnfv7v-4}.lst-kix_9vs8e8c3zi1a-3 > li:before{content:"(" counter(lst-ctn-kix_9vs8e8c3zi1a-3,decimal) ") "}.lst-kix_6k2le2ffwi0w-0 > li:before{content:"● "}ol.lst-kix_rqewq8aqps-8.start{counter-reset:lst-ctn-kix_rqewq8aqps-8 0}.lst-kix_9vs8e8c3zi1a-7 > li{counter-increment:lst-ctn-kix_9vs8e8c3zi1a-7}.lst-kix_6k2le2ffwi0w-2 > li:before{content:"■ "}ul.lst-kix_39m3fshxk7uj-1{list-style-type:none}ul.lst-kix_39m3fshxk7uj-2{list-style-type:none}ul.lst-kix_39m3fshxk7uj-0{list-style-type:none}ul.lst-kix_39m3fshxk7uj-5{list-style-type:none}ul.lst-kix_39m3fshxk7uj-6{list-style-type:none}ul.lst-kix_39m3fshxk7uj-3{list-style-type:none}ul.lst-kix_39m3fshxk7uj-4{list-style-type:none}ul.lst-kix_v2stjg4p63af-4{list-style-type:none}ul.lst-kix_v2stjg4p63af-3{list-style-type:none}ol.lst-kix_9vs8e8c3zi1a-4.start{counter-reset:lst-ctn-kix_9vs8e8c3zi1a-4 0}ul.lst-kix_v2stjg4p63af-2{list-style-type:none}ul.lst-kix_v2stjg4p63af-1{list-style-type:none}.lst-kix_2zh4wteyz1u1-1 > li:before{content:"○ "}ul.lst-kix_v2stjg4p63af-8{list-style-type:none}ul.lst-kix_v2stjg4p63af-7{list-style-type:none}ul.lst-kix_v2stjg4p63af-6{list-style-type:none}.lst-kix_y5dsvpnfv7v-5 > li{counter-increment:lst-ctn-kix_y5dsvpnfv7v-5}ul.lst-kix_v2stjg4p63af-5{list-style-type:none}ul.lst-kix_39m3fshxk7uj-7{list-style-type:none}.lst-kix_fyk9ikf7t2ba-0 > li:before{content:"● "}ul.lst-kix_39m3fshxk7uj-8{list-style-type:none}ul.lst-kix_v2stjg4p63af-0{list-style-type:none}ol.lst-kix_y5dsvpnfv7v-2.start{counter-reset:lst-ctn-kix_y5dsvpnfv7v-2 0}.lst-kix_1avzaiw5slv0-1 > li:before{content:"○ "}.lst-kix_q5x1pf79hzre-1 > li:before{content:"○ "}.lst-kix_9vs8e8c3zi1a-8 > li{counter-increment:lst-ctn-kix_9vs8e8c3zi1a-8}.lst-kix_q5x1pf79hzre-7 > li:before{content:"○ "}.lst-kix_v2stjg4p63af-8 > li:before{content:"■ "}.lst-kix_y5dsvpnfv7v-0 > li:before{content:"" counter(lst-ctn-kix_y5dsvpnfv7v-0,decimal) ". 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Federal Reserve (the Fed) If you want to learn more check out What is stated in the Free Rider Policy?
Don't forget about the age old question of Where does the phrase "PSL" come from?

3 Tools of Monetary Policy used by the Fed to change the money supply:

  1. Required Reserve Ratio (m) (fed controls)

m:  the percent of deposits banks must hold as reserves

  • If the Fed ↑ m, bank must hold more deposits as reserves
  • Banks have fewer funds available to lend
  • This will decrease the money supply
  • If the fed ↓ m, banks hold less deposits as reserves
  • Banks have more money to lend and money supply ↑

  1. Discount Rate Policy: The discount rate is the interest rate that the Fed Charges to banks that borrow $ from the Fed.
  • Ex. Deposit: $100 m=10%
  • RR = $10
  • Bank holding = $8 (because someone took out large loan)
  • At the end of the day, banks are required to maintain the RR, if they are short, they borrow money from the Fed and the banks pay it back plus interest
  • Fed is not required to lend $ to banks and can deny banks of borrowing
  • Banks may borrow from other banks that are holding excess reserves.
  • The interest rate that banks charge one another is the “Federal Funds Rate” (Fed Funds Rate)
  • The Fed Funds Rate is higher than the Fed’s interest
  • If the Fed increases the discount rate, banks may choose to hold some excess reserves to guard against falling below their required reserves
  • There is less $ available for banks to lend and money supply decreases

  1. Open Market Operations
  • Fed buys and sells government securities (treasury note / treasury bills / bonds)
  • Fed buys and sells from / to banks and non-bank public
  • When Fed sells T-bills / T-notes / Bonds and banks have less $ to lend ($supply ↓)
  • When Fed buys T-bills / T-notes / Bonds, they get T-bills / T-notes / Bonds and banks get $ so they have more $ to lend ($supply ↑)

Don't forget about the age old question of engr 231 uw

Don't forget about the age old question of What is the method used in collection classes?

If you want to learn more check out What is the global shift?

Money MarketDon't forget about the age old question of What are the three ways in which stage fright affect you?

1) Supply of Money

2) Demand of Money

Supply of Money

The supply of $ is determined by

The Fed using its 3 tools of Monetary Policy

  1. m
  2. Discount Rate
  3. Open Mar. Oper

Ex 1: Fed increases the required reserve

  • The $ supply↓
  • S0m shifts leftward to S1m

Ex 2: Fed buys government securities

  • $supply ↑
  • S0m shifts to the right S1m

Demand SIde of $ Market

Demand of Money

There is an inverse relationship between the interest rate and the quantity of money demanded

  • As interest rate ↑, we will choose to hold less money        ⎱households
  • As interest rate ↓, we will choose to hold more money        ⎰

Why?

Wealth ≡ money + interest earning assets (bonds)

                ↓                ↓        

        * easily spent                * ↑wealth

        * does not                 * interest earning assets cannot be used to buy goods

        increase wealth

Story

  • At the interest rate increase, the opportunity cost of holding money increases, here households will choose to hold more interesting earning assets
  • Household choose to hold less money
  • As the interest rate ↓, the opportunity cost of holding money decreases
  • Less wealth held as interest earning assets
  • Household hold more money

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