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Unformatted text preview: Money and Interest Rates Robert J. Blair Trident University International BUS 305 Module 4 Case Assignment Dr. Babb 5 Jun 2011 Money and Interest Rates 1. Suppose the Federal Reserve wanted to reduce the money supply. What are some of the tools the Fed would use to achieve this policy objective? The Fed may decrease money supply by increasing the required reserve ratio, raising the discount rate, or through open market operations such as selling government bonds. Although raising the required reserve ratio would decrease the money supply, the Fed tends to refrain from manipulating the reserve requirements due to the extreme difficulties this would put on bank policies.(Rittenberg & Tregarthen, 2009) Raising the discount rate that banks have to pay to borrow money from the Fed is another way to decrease the money supply by making it cost more for banks to get funds. Banks would in turn raise their interest rates thus increasing the cost of everything which in turn will pull money out of the economy lowering the money supply. The problem is that banks dont generally borrow reserves from the Fed, instead they borrow from each other using the federal funds market and set their own rates based off supply and demand.(Rittenberg & Tregarthen, 2009) Selling and buying federal government bonds is the Feds most effective tool for controlling the money supply. By selling Bonds the Fed will receive money from the buyer of the bond. This money comes out of the buyers banks reserves. With the banks reserves and checkable deposits decreased essentially taking money out of the money supply.(Rittenberg & Tregarthen, 2009)essentially taking money out of the money supply....
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