The Federal Reserve Part 2 Monetary Policy

Under the Monetary Policy definition, write: Easy Money Policy Easy money policy is monetary policy that results in increasing the money supply by lowering interest rates & greater access to credit Monetary Policy (& the fed) Actions used by the Fed (FOMC) to expand (increase) or contract (decrease) the money supply Easy money policy Easy money policy is monetary policy that results in increasing the money supply by lowering interest rates & greater access to credit

1. Reserve requirement: Fed would lower; frees excess reserves because fewer are needed to back existing deposits in the 2.*Open market operations: the Fed buys securities 3. Discount rate: Fed lowers discount rate; Additional reserves an be obtained at lower cost. Excess reserves increase Monetary Policy (& the fed) Actions used by the Fed (FOMC) to expand (increase) or contract (decrease) the money supply Easy money policy Easy money policy is monetary policy that results in increasing the money supply by lowering interest rates & greater access to credit How does the Fed manipulate the tool box to increase the money supply? 1. Reserve requirement: Fed would lower; frees excess reserves because fewer are needed to back existing deposits in the 2. *Open market operations: the Fed buys securities; checks written 3. Discount rate: Fed lowers discount rate; Additional reserves an be obtained at lower cost. Excess reserves increase How does the Fed manipulate the tool box to increase the money supply? When money supply expands (or increases), the price of credit goes down. *The supply curve has a vertical slope, because the supply of money is fixed.

Tight money policy is monetary policy that results in decreasing the money supply by raising interest rates & less access to credit 46 tight money policy Tight money policy is monetary policy that results in decreasing the money supply by raising interest rates & less access to credit Under the Monetary Policy definition, write: Tight Money Policy

1. Reserve requirement: Fed would raise; more reserves are required to back existing deposits 2.*Open market operations: the Fed sells securities; 3. Discount rate: Fed raises discount rate; Additional reserves through borrowing are now more expensive—banks will want to borrow less 46 tight money policy Tight money policy is monetary policy that results in decreasing the money supply by raising interest rates & less access to credit How does the Fed manipulate the tool box to decrease the money supply? 1. Reserve requirement: Fed would raise; more reserves are required to back existing deposits 2.*Open market operations: the Fed sells securities; 3. Discount rate: Fed raises discount rate; Additional reserves through borrowing are now more expensive— banks will want to borrow less How does the Fed manipulate the tool box to decrease the money supply? When money supply contracts (or decreases), the price of credit goes up. *The supply curve has a vertical slope, because the supply of money is fixed.