ECON 104 Lecture 12: 11 -

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ECON 104
Ozgur Orhangazi

The FED decides and tells the bank how much the bank must keep in the reserve. The things the FED can do to affect mone yin the market The FED can Sell Bonds – To borrow money The FED can Buy bonds – to increase money in the market The fed can increase/decrease the required reserve ratio so that banks lend more or less. The Discount Rate The interest rate that banks pay to the fed to borrow from it. The risk free rate. The interest rate that banks pay to the fed to borrow from it. When banks increase their borrowing, the money supply increases. FED 3 tools (repeating) 1. Required reserve ratio a. How much money banks must hold in their bank – the higher the ratio, the less to lend for banks. 2. The Bonds – Buying and sellingbonds by the fed can increase and decrease the money in the market 3. The Discount rate – Increasing the rate makes it harder for banks to lend, decreasing rate makes it easier. a. The required discount rate is a very long term tool. The discount rate changes but
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