Monday, April 10, 2017

Tools of Monetary Policy

3-31-17

Tools of Monetary Policy


3 tools
  1. Setting RR
  2. lending $ to banks and thrifts
    • Discount rate
  3. Open Market Operations
    • Buying and selling bonds
RR
  • "fractional reserve system"
  • The Fed sets the amount that bank must hold
  • RR is % of deposit that banks must hold in reserve
    • loan eventually becomes deposits for another bank that will loan out ER 
  • If there is a recession fed actions on RR
    • decrease reserve ratio
      • Banks hold decrease money and have more ER
      • Banks create more $ by loaning out excess
      • money supply increases, interest falls, AD increases, RR decreases, MS increases, i increases, I increases, and AD increases
  • If there is inflation fed actions on RR
      • Increases reserve ratio
        • Banks hold more money and have less excess reserve
        • banks create less money
        • RR increases, MS decreases, i increases, I decreases, AD increases
  • OMO is when fed. buy or sell govt bonds
  • this is most important and widely used monetary olicy
  • of fed buys bonds it takes bonds out of the eco and replaces them with $
  • If fed sell bonds it takes $ and give the security to the investor
  • To increase MS fed should BUY govt securities
  • to decrease MS fed should sell govt securities
  • If fed buys bonds the DD X MM
Discount Rate
  • interest rate that fed charges commercial banks for short term loans
  • DD generally not used by the fed to affect monetary supply

4 comments:

  1. I really love how your blog easily displays the main points of the section.For the RR part of your notes, the sections are very well divided which portrays your organizational skills, and helps the reader with understanding. Keep up the good work!

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  2. I like your blog; it is very well organized and the color-coded subheadings help with differentiating the sections. However, it would be very beneficial to explain how the image above connects with the entry itself. How do these tools affect monetary policy? Other than that, great job!

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  3. Your notes are very helpful and informative. Although, I think you should include more videos or a link to understand monetary policy more. Another thing I would suggest is including the tools of the monetary policy in a chart to make it seem more organized. What happens when there's a recession or inflation? Do they buy bonds or sell them?

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  4. I agree with the notes you've put but just make sure you look over them because there are some typos. Also, for the OMO I think you should lay it out more organized because it is separated in bullets randomly. It's just to help the reader understand the notes more! Overall, your Blog is great!

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