Tools of the Fed

1. Tools of the Fed Warm Up: How can the fed influence the money supply of the nation?

2. Open market operations • The Fed buys and sells existing Treasury securities on the open market. • To conduct easy monetary policy, the Fed buys securities, which means that sellers (banks) end up with fewer securities and more money. • To conduct more restrictive monetary policy, the Fed sells securities and buyers end up with more securities and less money. Fed buys securities = money supply Fed buys securities = money supply

3. Reserve requirements • The percentage of checking deposits that the Fed requires banks to hold as reserves. Extra reserves can be loaned out. • The Fed rarely alters these requirements. • When the required reserve ratio is increased, the money supply contracts. When the required reserve ratio is decreased, the money supply expands. Reserve Ratio Money Supply Reserve Ratio Money supply

4. Discount rate • The interest rate the Fed charges banks for short-term loans. • To conduct easy monetary policy, the Fed lowers the discount rate. • To conduct more restrictive monetary policy, the Fed increases the discount rate Discount Rate Money supply Discount Rate Money Supply

5. Tools of the Federal Reserve Worksheet • If an economy is expanding too rapidly & the economy is therefore suffering from high inflation, then would putting more money in the economy make matters better or worse? Explain. • If an economy is not expanding & the economy is therefore suffering from high unemployment, then would putting more money in the economy make matters better or worse? Explain. • How can the Fed put more money into the economy? • How can the Fed take money out of the economy? • If you were a member of the Board of Governors & were faced with a high inflation rate, then how could you lower it using reserve requirements? • If you were a member of the Board of Governors & were faced with a high unemployment rate, then how could you lower it using the discount rate? • If you were a member of the Federal Open Market Committee (FOMC) & were faced with a high inflation rate, then how could you lower it using open-market operations? • If you were a member of the Federal Open Market Committee (FOMC) & were faced with a high unemployment rate, then how could you lower it using open-market operations? • What tends to happen to the unemployment rate (at least in the short run) if the Fed works to lower the inflation rate? Why? • What tends to happen to the inflation rate if the Fed works to lower the unemployment rate? Why?

6. Efforts to Revive Economy Test Inflation Theories

7. 20 Word GIST • Describe how the 3 tools of the Fed are used to affect the economy.