What Effect Do Open Market Purchases Have On The Money Supply Curve?
 | Economics fourteen |
Lecture xix: Monetary Policy
Federal Reserve
tools of monetary policy
expansionary monetary policy
contractionary monetary policy
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Federal Reserve
Monetary policy involves control of the quantity of coin in the economy. The Federal Reserve is responsible for budgetary policy in the Us.
Click here for an introduction to the Federal Reserve System from the St. Lous Fed.
organization:
- District Banks
- Board of Governors (chairman is Alan Greenspan)
- Federal Open Marketplace Commission
Tools of Monetary Policy
1. open market operations
Open up market operations is the buying and selling of government bonds by the Federal Reserve. When the Federal Reserve buys a authorities bond from a banking company, that bank acquires money which information technology tin can lend out. The money supply will increase. An open market buy puts money into the economy.
2. disbelieve rate
When the Federal Reserve makes a loan to a fellow member bank, the loan is called a discount loan. The interest charge per unit on a discount loan is called the disbelieve rate.
Lowering the discount rate encourages banks to have out more than disbelieve loans while raising the charge per unit discourages banks from borrowing from the Fed. Therefore, lowering the discount rate puts coin into the economic system; raising the disbelieve rate takes coin out of the economy.
3. reserve ratio
The reserve ratio is the percent of deposits banks are required to concur as vault greenbacks and not loan out.. Lowering the reserve ratio allows banks to loan out a greater fraction of deposits and the money supply would increase. Raising the reserve ratio would cause the coin supply to shrink.
Expansionary Budgetary Policy
To increase the money supply, the Federal Reserve tin
- purchase government bonds (an open market purchase)
- lower the discount rate
- lower the reserve ratio
Expansionary monetary policy is appropriate when the economy is in a recession and unemployment is a problem.
Changes in the money supply touch the economy through a 3 pace process.
- an increment in the money supply causes interest rates to fall
- the decrease in interest rates causes consumption and investment spending to rising and and so amass demand rises
- the increase in aggregate need causes existent GDP to rise
Contractionary Monetary Policy
To decrease the money supply, the Federal Reserve can
- sell government bonds (an open market place auction)
- raise the disbelieve rate
- raise the reserve ratio
Contractionary budgetary policy is appropriate when inflation is a problem.
- a decrease in the money supply causes interest rates to ascent
- the increase in involvement rates causes consumption and investment spending to fall and so amass demand falls
- the subtract in aggregate need causes real GDP to fall
Source: http://www2.york.psu.edu/~dxl31/econ14/lecture19.html
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