The third way that the Fed can influence the money supply is through changing the federal funds inte

The third way that the Fed can influence the money supply is through changing the federal funds inte

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The third way that the Fed can influence the money supply is through changing the  federal funds interest rate. As we know, banks make deposits, withdrawals, and loans  from banks' banks that are usually branches of the Fed. When a bank makes many  loans, its reserves are near their absolute required minimum. If a customer makes a  withdrawal, banks must either recall a loan or take out a loan to pay the withdrawal while  still maintaining the necessary reserves. If the Fed increases the federal funds interest  rate, banks will be less likely to borrow money from the Fed and will thus be more weary  of making loans to ensure that they have the necessary reserve requirements. Thus, if  the federal funds interest rate is higher, banks make fewer loans, the money multiplier is  not fully utilized to its end, and the change in the money supply for a given initial deposit  is smaller.  Expansionary vs. Contractionary Monetary Policy  The Fed has two basic types of monetary policy. Expansionary monetary policy 
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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The third way that the Fed can influence the money supply is through changing the federal funds inte

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