MONETARY POLICY

1. Reserve requirement 

- only a small percent of your bank deposit is in the safe. The rest of your money has been loaned out "fractional reserve banking" .

-the FED sets amount the banks .must hold.

-the reserve requirement reserve ration is the % if deposites that banks must hold in reserve and not loan out.

-when the FED increases the money supply it increases the amount of money held in money deposits.

If there is a recession rr=decrease

Decrease

-banks hold less money and have more excess reserves

-banks creates more money by loaning out excess

-money supply increases intrest rates fall, AD goes up

If the theres is inflation rr=increase

Increase

-banks hold money and have less excess reserve

-banks creates less money

-money supply decrease, interest rates up, AD down

2. Discount rate 

-The discount rate is the interest rate that the FED charges commercial banks

To increase the money supply the FED should decrease the discount rate

To decrease the money supply the FED should increase the discount rate

3. Open money operations

-the FED buys / sells government bonds (securities)

-this is the most important and widely used monetary supply

Increase money supply the FED should buy government securities

Decrease money supply the FED should sell government securities

Federal fund rate- FDIC member banks loan each other overnight funds 

Prime rate- Intrest rate that banks give to their most credit worthy customers