Tools of Monetary Policy

Fiscal Policy

• controlled by Congress and the President
• tax created by spending

Monetary Policy

• controlled by the FED and the federal reserve bank
• Open Market Operation
• Discount Rate
• Federal Fund Rate
• Reserve Requirement

Monetary Policies

• Open Market Operations ( OMO )
• to buy or sell securities ( bonds )
• Expansionary ( recession, "easy money" )
• buy bonds
• money supply would increase
• Contractionary ( inflation, "tight money" )
• sell bonds
• money supply would decrease
• Discount Rate
• interest rate that the FED charges banks for taking out loans
• Expansionary
• decrease in interest rate
• Contractionary
• increase in interest rate
• Reserve Requirement
• percentage or amount the bank has to hold and keep in reserve
• Expansionary
• decrease in required reserves
• Contractionary
• increase in required reserves

Scenarios to use for help :

FED Actions and Their Effects

1. Sold treasury securities on the open market
• Bank reserves would decrease
• Money supply would decrease
2. Bought treasury securities on the open market
3. Bank reserves would increase
4. Money supply would increase
5. Raised discount rate
• Bank reserves would decrease
• Money supply would decrease
6. Lowered discount rate
• Bank reserves would increase
• Money supply would increase
7. Raised reserve requirement
• Bank reserves would decrease
• Money supply would decrease
8. Lowered reserve requirement
• Bank reserves would increase
• Money Supply would increase