fed - Federal Reserve Economics 71a Spring 2007 Mayo,...

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Federal Reserve Economics 71a Spring 2007 Mayo, Chapter 5 (skim) Lecture notes 2.5
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Federal Reserve Goals Stable prices Full employment Growth Tools Monetary policy Bank regulation
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Money Growth and Inflation “Why monetary policy is tricky” (Money growth) > (Economic growth) Inflation (Money growth) < (Economic growth) Deflation Getting this right is tricky
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The Federal Reserve and the Money Supply The Fed does not set the money supply Indirect tools Reserve requirements Discount rate Open market operations All are only indirect
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Reserve Requirements Deposit $100 in bank Bank must keep % (reserve) in vault Loans out rest Example 10%: Keep $10 (reserve), loan $90 This $90 ends up at another bank Keep $9, loan $81 Money multiplier Reducing the reserve requirement has big positive impact on the money supply Rarely done
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Discount Rates Banks can borrow reserves from the Fed Interest rate Fed charges banks is called the
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fed - Federal Reserve Economics 71a Spring 2007 Mayo,...

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