secondary monetary policy tools jill student jack deskoccupier dan intheclouds joanie...
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Secondary Monetary Policy Tools
Jill StudentJack DeskoccupierDan Intheclouds
Joanie Willgraduatesoon
Austrian EconomicsMay Term 2015
Professor Hal SnarrWestminster College
Secondary Monetary Policy Tools
• What is the Federal Reserve system?
• What are the Fed’s four primary monetary policy tools?
• What is the FOMC?
• Who chairs the FOMC?
• How often does the FOMC meet?
• What are the primary objects of the FOMC?
SR
Federal Funds Market
28
iff
2
3
DR
Secondary Monetary Policy Tools
Changing the discount rate– The Fed raises the discount rate to 4%.
4
R
SR
Federal Funds Market
28
iff
2
DR
Secondary Monetary Policy Tools
Changing the discount rate– The Fed raises the discount rate to 4%.
4
R
SR
Federal Funds Market
28
iff
2
3
DR
Secondary Monetary Policy Tools
Changing the discount rate– The Fed raises the discount rate to 4%.– The equilibrium does not change when the Fed lowers the discount rate back to 3%.
R
Secondary Monetary Policy Tools
Changing the discount rate– If only the discount rate is reduced or raised at most 5 basis points, how does this
affect:
• Quantity of reserves• Federal funds rate• Other interest rates• Real GDP• Price level• Unemployment rate
SR
Federal Funds Market
28 R
iff
2
3
DR
Secondary Monetary Policy Tools
– When the Fed raises rrr, demand for reserves shifts out
Changing the required reserve ratio
Secondary Monetary Policy Tools
– When the Fed raises rrr, demand for reserves shifts out
Changing the required reserve ratio
SR
Federal Funds Market
28 R
iff
2
3
DR
Secondary Monetary Policy Tools
– When the Fed raises rrr, demand for reserves shifts out – iff rises to id
Changing the required reserve ratio
SR
Federal Funds Market
28 R
iff
3
DR
Secondary Monetary Policy Tools
– When the Fed raises rrr, demand for reserves shifts out – iff rises to id provided the Fed adds $5b to reserves by issuing $5b in discount loans.
Changing the required reserve ratio
SR
Federal Funds Market
28 R
iff
32
3
DR
Secondary Monetary Policy Tools
– When the Fed raises rrr, demand for reserves shifts out– iff rises to id provided the Fed adds $5b to reserves by issuing $5b in discount loans.– The equilibrium quantity of reserves increases to $32b.
Changing the required reserve ratio
SR
Federal Funds Market
28 R
iff
32
3
DR
Secondary Monetary Policy Tools
– If only required reserves ratio is raised, how will this affect:
• Quantity of reserves• Federal funds rate • Overall bank lending• Money Supply and nominal rate of interest• Real GDP• Price level• Unemployment rate
Changing the required reserve ratio