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32.1 POLICY TOOLS OF THE FEDERAL RESERVE SYSTEM

32.1 POLICY TOOLS OF THE FEDERAL RESERVE SYSTEM - SECTION...

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SECTION 32: POLICY TOOLS OF THE FEDERAL RESERVE SYSTEM
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MAJOR POLICY TOOLS OF THE FEDERAL RESERVE SYSTEM THE REQUIRED RESERVE RATIO THE DISCOUNT RATE CONDUCT OPEN MARKET OPERATIONS
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TOOLS OF THE FED TOOL 1: REQUIRED RESERVE RATIO The percentage of deposits that a bank must keep as reserves Deposits required reserve ratio $0 - $54 million 3% Over $54 million 10% The Fed can raise or lower the required reserve ratio. This affects the amount of money that banks are able to lend to the public.
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EXPANSIONARY MONETARY POLICY: LOWER THE REQUIRED RESERVE RATIO This will free up excess reserves that can then be loaned out. This will increase the money supply. CONTRACTIONARY MONETARY POLICY: INCREASE THE REQUIRED RESERVE RATIO This will cause more required reserves to be held Less money will be available to be loaned out. This will decrease the money supply. Changing the required reserve ratio is used very rarely.
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TOOLS OF THE FED: TOOL 2: THE DISCOUNT RATE The interest rate that banks pay to the Fed when banks
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