Monetary Policy

Discount Rate The Interest Rate charged by the Federal Reserve to Banks for money obtained from the Federal Reserve Bank (Banks borrowing money from the Federal Reserve Bank)

Open-Market Operations The Buying and Selling of government securities (bonds) through primary dealers by the Federal Reserve in order to influence the Money Supply

Reserve Requirement (Ratio) The Percentage of checkable deposits that Banks are required to hold in Reserve, either in their bank vaults or Deposited at the Federal Reserve Bank. Note** Checkable Deposits are checking accounts, Also referred to as Demand Deposits

Interest On Reserves Interest paid by the Federal Reserve to Banks on required and excess reserves deposited at the Federal Reserve Banks ****Excess Reserves – Any money held by banks in addition to the required reserves.

Expansionary Monetary Policy When expansionary monetary policy is used, the Money Supply will Increase, Interest Rates will Decrease, and Aggregate Demand will Increase. GDP will Increase.

Expansionary Monetary Policy Used when the Concern is a Recession/high unemployment (Contractionary Phase of the Business Cycle) Open Market Operations: Buy Bonds Discount Rate: Decrease the discount rate to make it cheaper for banks to borrow money from the Federal Reserve. Required Reserves: Decrease the Reserve Requirement so banks can hold a smaller percentage of checkable deposits (gives them more money to loan/invest)

Contractionary Monetary Policy Main Concern: Inflation – The Economy Growing Too Quickly Open Market Operations – Sell Bonds Discount Rate – Increase Reserve Requirement - Increase

Contractionary Monetary Policy When Contractionary Monetary Policy is used, the money supply will Decrease, Interest rates will increase, and Aggregate Demand will decrease. GDP will Decrease.