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Unit 4- Monetary Policy

Reserve Requirement- banks must hold a % of all private deposits in the volt, this can not be used for loans,
raising the RR, forces banks to reduce loans.
Lowering the RR allows banks to create more loans

Discount Rate- FDIC member banks and other eligible institutions may burrow short-term loans directly from the Fed
>considered to the bank's last resort
-banks do NOT like to burrow from the bank

Federal Fund Rate-
FDIC member banks loan each other overnight funds
(like burrowing from brother or home-girl - friendly loan)
burrowing bet. banks

Prime Rate - the interest rate that banks charge their most credit-worthy customers

Open Market Operations (OMO): Fed can either buy or sell bonds
                                          *Sell bonds - Fed gets the cash, thus removes it from money supply (Sm)
                                          *Buy bonds - nation gets the cash, which ↑ Sm

 Expansionary Monetary Policy
 Contractionary Monetary Policy
 *MS is
→ (inc.)
 *MS is (dec.)
 *ir (dec.)
 *ir (inc.)
 *Reserve ratio (dec.)
*Discount Rate (dec.)
 *Reserve ratio (inc)
*Discount Rate (inc.)
 OMO: Buy bonds (more money)
 OMO: Sell bhnds (less $)
 MS (inc.)
 MS (dec.)`
 Expansionary Monetary Policy
"Easy" Money (Recession)
Contractionary Monetary Policy
"Tight" Money (Inflation)
 -Buy bonds (Big bucks)
-RR ↓
-DR  ↓
-FFR ↓
-i    ↓
-Ig  ↑
-AD ↑
-MS ↑
-$ Depreciates
 -Sell bonds
-RR ↑
-DR  ↑
-FFR ↑
-i   ↑
-Ig   ↓
-AD ↓
-MS ↓
-$ Appreciates

Loanable Funds
The market where buyers and savers meet to exchange funds at the real IR
-both demand and supply for LF comes from households, firms, the gov't, and the foreign sector

 Fighting a Recession

 Fighting Inflation
 The budget will cause: Deficit
S LF = ↓
D LF = ↑
 The budget issue will cause: Surplus
S LF = ↑
D LF = ↓

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