1. Tools to adjust the Money Supply

2. Adjusting the Reserve Requirement
Raising the Reserve Ratio
Banks must hold ______ reserves
Banks create ______ money as they ______ lending
Money supply _______
How would you characterize this monetary policy?
Lowering the Reserve Ratio

3. The Discount Rate
The Discount Rate is the interest rate that the FED charges commercial banks in an emergency. It is usually ~1% higher than the FFR.
To increase the Money supply, the FED should _________ the Discount Rate (Easy Money Policy).
To decrease the Money supply, the FED should _________ the Discount Rate (Tight Money Policy).

4. Tools to adjust the Money Supply

5. Open market Operations
FED buys or sells government bonds (securities), known as alternately as T-bonds.
* Most widely used monetary policy.
To increase the Money supply, the FED should _________ government securities.
To decrease the Money supply, the FED should _________ government securities.
***When the government sells bonds, you give them money. This decreases the money supply!

6. Trace out the effects of a $50 billion dollar bond purchase from the federal reserve bank given a required reserve ratio of .1 on:
1. The monetary base.
Demonstrate graphically how this will affect:
2. The money market.
3. AD and AS.
4. Under what circumstances might this seem like an appropriate policy?

7. As of October 2014, the Fed ended its long term bond-buying program
As of October 2014, the Fed ended its long term bond-buying program. At its height, the program called for the purchase of $85 billion in government securities every month. How will the end of this program affect the money supply? Interest rates? How would you characterize this policy? Why would the Fed end it?

10. The Keynesian 3 Step Transmission
Showing the Effects of Monetary Policy Graphically
The Keynesian 3 Step Transmission

11. Quantity of money demanded and supplied
Money Market
Loanable Funds
Sm1
Sm2 10 8 6 10 8 6
Real rate of interest, i
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of investment, I
AD and AS AS
If the Money Supply Increases to Stimulate the Economy…
Price level
Interest Rate Decreases P2
Investment Increases P1
AD & GDP Increases
with slight inflation
AD2(I=$20)
AD1(I=$15)
Real domestic output, GDP

12. Quantity of money demanded and supplied
Money Market
Loanable Funds
Sm2
Sm1 10 8 6 10 8 6
Real rate of interest, i
Real rate of interest, i Dm
Quantity of money demanded and supplied
Amount of investment, I
AD and AS AS
If the Money Supply Decreases to contract the Economy…
Price level
Interest Rate increase
Investment decrease
AD & GDP decrease
Real domestic output, GDP

13. Loanable Funds Market
The private sector supply and demand of loanable money.
This shows the effect on real interest rate

14. Loanable Funds Market What is the result of deficit spending?
Government borrows from private sector
Increasing demand for loanable funds
Increases the real interest rate.
This is the Crowding Out Effect!!

15. Other responsibilities of the FED:
Clearing check for members banks
Holding deposits of member banks
Making loans to member banks
Serving as a bank to the federal government

17. Trace out the effects of a $200 billion dollar bond sale from the federal reserve bank given a required reserve ratio of .2 on:
1. The monetary base.
Demonstrate graphically how this will affect:
2. The money market.
3. AD
4. Under what circumstances might this seem like an appropriate policy?