Secondary Monetary Policy Tools Jill Student Jack Deskoccupier Dan Intheclouds Joanie Willgraduatesoon Austrian Economics May Term 2015 Professor Hal Snarr Westminster College

Secondary Monetary Policy Tools What is the Federal Reserve system? What are the Fed’s four primary monetary policy tools? What is the FOMC? Who chairs the FOMC? How often does the FOMC meet? What are the primary objects of the FOMC?

SRSR Federal Funds Market 28 i ff 2 3 DRDR Secondary Monetary Policy Tools Changing the discount rate – The Fed raises the discount rate to 4%. 4 R

SRSR Federal Funds Market 28 i ff 2 DRDR Secondary Monetary Policy Tools Changing the discount rate – The Fed raises the discount rate to 4%. 4 R

SRSR Federal Funds Market 28 i ff 2 3 DRDR Secondary Monetary Policy Tools Changing the discount rate – The Fed raises the discount rate to 4%. – The equilibrium does not change when the Fed lowers the discount rate back to 3%. R

Secondary Monetary Policy Tools Changing the discount rate – If only the discount rate is reduced or raised at most 5 basis points, how does this affect: Quantity of reserves Federal funds rate Other interest rates Real GDP Price level Unemployment rate

SRSR Federal Funds Market 28R i ff 2 3 DRDR Secondary Monetary Policy Tools – When the Fed raises rrr, demand for reserves shifts out Changing the required reserve ratio

Secondary Monetary Policy Tools – When the Fed raises rrr, demand for reserves shifts out Changing the required reserve ratio SRSR Federal Funds Market 28R i ff 2 3 DRDR

Secondary Monetary Policy Tools – When the Fed raises rrr, demand for reserves shifts out – i ff rises to i d Changing the required reserve ratio SRSR Federal Funds Market 28R i ff 3 DRDR

Secondary Monetary Policy Tools – When the Fed raises rrr, demand for reserves shifts out – i ff rises to i d provided the Fed adds $5b to reserves by issuing $5b in discount loans. Changing the required reserve ratio SRSR Federal Funds Market 28R i ff 32 3 DRDR

Secondary Monetary Policy Tools – When the Fed raises rrr, demand for reserves shifts out – i ff rises to i d provided the Fed adds $5b to reserves by issuing $5b in discount loans. – The equilibrium quantity of reserves increases to $32b. Changing the required reserve ratio SRSR Federal Funds Market 28R i ff 32 3 DRDR

Secondary Monetary Policy Tools – If only required reserves ratio is raised, how will this affect: Quantity of reserves Federal funds rate Overall bank lending Money Supply and nominal rate of interest Real GDP Price level Unemployment rate Changing the required reserve ratio