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Principles of Economics- Mankiw (5th) 595

Principles of Economics- Mankiw (5th) 595 - CHAPTER 27 T H...

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CHAPTER 27 THE MONETARY SYSTEM 615 financial center of the U.S. economy and because all Fed purchases and sales of government bonds are conducted at the New York Fed’s trading desk. Through the decisions of the FOMC, the Fed has the power to increase or de- crease the number of dollars in the economy. In simple metaphorical terms, you can imagine the Fed printing up dollar bills and dropping them around the coun- try by helicopter. Similarly, you can imagine the Fed using a giant vacuum cleaner to suck dollar bills out of people’s wallets. Although in practice the Fed’s methods for changing the money supply are more complex and subtle than this, the helicopter-vacuum metaphor is a good first approximation to the meaning of monetary policy. We discuss later in this chapter how the Fed actually changes the money sup- ply, but it is worth noting here that the Fed’s primary tool is open-market opera- tions —the purchase and sale of U.S. government bonds. (Recall that a U.S.
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