Stabilizing the Economy: The Role of the Fed Chapter 14

Chapter 14 Learning Objectives. You should be able to: Distinguish between the Federal funds rate and the discount rate. Explain how the Fed influences the interest rate. Show how a demand and supply diagram can be used to model the determination of the Federal Funds rate. Show the effect of expansionary and contractionary monetary policy on the Keynesian cross diagram.

Important Distinction Federal Funds Rate -rate of interest banks charge one another for short-term loans. Money is transferred between accounts at the Fed—hence fed funds Discount Rate -rate of interest the Fed charges banks for short-term loans. Originally banks would sell loans to the Fed. The present value would be calculated using the rate of discount.

Most Important Tool of Monetary Policy Open market operations: the purchase or sale of Treasury securities by the Fed Sell Treasury securities: contractionary. Buy Treasury securities: expansionary.