Fed tools for changing the Money Supply. Mr. Nunn

Why would the Fed want to change the money supply?

Inflation Deflation Spur Investment Interest rates Spur Consumption Buoy the economy

Changing Reserve Requirement Change in money supply = 1/reserve requirement x change in reserves of first bank. Lower reserve requirements = money supply rises Raise reserve requirements = money supply falls

Changing Reserve Requirements Change in money supply = 1/reserve requirement x change in reserves of first bank. Let’s say the bank has a $1000. Change the reserves to three different reserve requirements. 5%, 10%, and 20% Which reserve requirement increased the money supply most? Which reserve requirement decreased the money supply most?

Open Market Operations Buying and selling of government securities by the Fed. Open Market Purchase= money supply rises Open Market Sale= money supply falls

Open Market Operations Inflation is increasing rapidly and it now up to the Fed to stop this inflation. What open market operation can help stop inflation and how does it work?

Changing the discount rate Federal funds rate- the interest one bank charges another for a loan. Discount rate- the interest rate the fed charges the bank for a loan.

Changing the discount rate Lower the discount rate = money supply rises Raise the discount rate =money supply decrease

Discount Rates The Fed wants to encourage banks to make more loans. Should the Fed lower or raise the discount rate compare to the the federal funds rate? How would changing the discount rate help?