Economics A100 Lecture Notes - Lecture 25: Openmarket, Money Supply, Federal Funds Rate
28 Dec 2020
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Document Summary
There are 2 groups of tools that the fed uses: Open-market operations: the buying and selling of government bonds by the. To increase money supply, they tell bond traders at the new york fed. Fed to buy bonds from the public in the nation"s bond markets. To reduce money supply, they sell govt bonds to the public. The public pays for these bonds with its holdings of currency and bank deposits, directly reducing the amount of money in circulation. This is the tool the fed uses most often, bc it"s the easiest. Fed lending to banks: lending reserves to banks lets the fed increase the quantity of reserves in the economy. Banks can borrow from the fed"s discount window and pay an interest rate on that loan called the discount rate. A higher discount rate discourages banks from borrowing reserves from the fed, which reduces the quantity of reserves in the banking system, which reduces money supply (and vice versa)
