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Name_______________________date due___
Date Handed In________Ch__ Sec__
Posted on internet Friday 05_18
Chapter 16: Section 3: Monetary Policy Tools
Date Due: 05_21 Monday Pgs. 420 to 423
Graphs Fig.16.1; 16.2; 16.3; 16.4; 16.5; 16.6.; 16.7; 16.8
Global Connection: pg.429 Skills for Life: page: 419 Fast Fact
pg.417; Economic Profile Alan Greenspan pg.424,; Case study Banking,
Monetary Policy, and the Great Depression: pg. 435
Objectives: After studying this section you will be able to:
A. Describe the process of money creation.
B. Explain how the Federal Reserve uses reserve requirements,
the discount rate, and open market operations to implement U. S.
Monetary policy
C. Understand why some monetary policy tools are favored over
others.
Main Idea: Banks create money in their day-to-day operations.
The Federal Reserve uses the tools of monetary policy to control
the amount of money in circulation.
Money Creation
1. The_________ affect in__________ policy says that everyone
dollar change and fiscal policy creates a change_____- than one
dollar in the economy. When you deposit thousand dollars and the
savings account money_______ begins, the bank cannot lend $1000
because it must reserve a fraction of that deposit is called the
(R R R) required_______ ratio.
2. Your bank will lend $900 if the R R R is 10%. The money
multiplier formula is you $1000 times one divided by RRR or
$1000X 1/.1 so 1/.1=10; 10 times 1000= 10,000 increase in money
supply, so your initial $1000 as increase the money supply this
country by $10,000 dollars.
Reserve Requirements
3. A reduction in the RRR would allow banks to loan more money
and increase the money multiplier which would lead to an_____in
the money supply, an increase in the RRR would reduce the amount
that the bank can lend and decrease the multiplier thereby
reducing the______ supply.
Discount Rate
4. The_______ rate is the interest rate that the Federal Reserve
charges on loans to financial institutions, banks borrow from
the Fed to maintain ______ at the required______, the______ rate
is the rate of interest banks charge on short term loans to the
best customers usually large companies with good credit ratings.
5. By decreasing the_______ rate, the Fed encourages the banks
to get rid of excess reserves through lending those reserves
thereby increasing the______ supply, conversely by increasing
the________ rate banks will hold on to their reserves and not
borrow at the higher rate thereby decreasing the money________.
Open Market Operations
6. Open_______ operations is the most important monetary policy
tool that the Fed has, the buying and selling of government
securities on the open market alters the money supply and is the
most used__________ tool. When the Federal Open Market Committee
or FOMC wants to increase the money supply they buy government
securities, the sellers deposit the money in their banks and the
money_______ effect begins. Conversely, to reduce the money
supply the FOMC sells government security and_______ the money
supply.
Using Monetary Policy Tools
7. Today the Fed does not change_______ requirements to
conduct________ policy, nor do they change the_______ rate
frequently, open_________ operations are less disruptive of
financial operations.