Review Baby! 1) Tools of Monetary Policy 2) Reserve Requirement 3) Deposit Expansion Multiplier

Reserve Requirement (aka Reserve Requirement Ratio or Reserve Ratio) What are the three tools of monetary policy? Reserve Requirement (aka Reserve Requirement Ratio or Reserve Ratio) Discount Rate Open Market Operations: Buying or Selling of Govt Securities.

What is the Reserve Requirement or Reserve Ratio? The percentage of checkable deposits (demand deposits) banks may not lend out.

What is the Discount Rate? The interest rate charged by the Fed when banks borrow money from the Fed.

What are Open Market Operations? The buying and selling of government securities in order to expand or reduce the money supply.

What is the difference between the Discount Rate and the Federal Funds Rate? The Discount Rate is the interest rate charged by the Fed when banks borrow from the Fed. The Federal Funds Rate is the interest rate charged by banks when they borrow from each other. The Federal Funds Rate is not set by the Fed, but by commercial banks. The Fed influences the Federal FundsRate by buying or selling government securities.

How can “new” money be created? When banks make loans. When the Federal Reserve (Fed) buys government securities (aka Treasury Securities or bonds) from the public or banks.

What are excess reserves, required reserves, and actual (total) reserves? Excess Reserves = Demand Deposits banks may lend out Required Reserves: = Demand Deposits banks may not lend out. Actual Reserves = Required Reserves + Excess Reserves

Only its amount of excess reserves. How much can any one bank lend out. Only its amount of excess reserves.

The amount of excess reserves x the Deposit Expansion Multiplier How much can the banking system lend out. The amount of excess reserves x the Deposit Expansion Multiplier

If the Fed wants to fight recession it will __________ the reserve requirement. Why? Decrease This will create more excess loans for banks to lend out, thus increasing the money supply.

What is the Deposit Expansion Multiplier (aka the Money Multiplier) formula? 1/reserve requirement

How is the Deposit Expansion Multiplier used? It is multiplied by the amount of excess reserves there are to determine the maximum amount of money creation by the banking system via loans and redeposits of loans.

If the Fed wants to fight inflation it will __________ the reserve requirement. Why? Increase This creates fewer excess reserves for banks to lend out, thus reducing the money supply.