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fed - F e d e ra l R e s e rv e Goals F e d e ra l R e s e...

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1 Federal Reserve Economics 71a Spring 2007 Mayo, Chapter 5 (skim) Lecture notes 2.5 Federal Reserve Goals Stable prices Full employment Growth Tools Monetary policy Bank regulation Money Growth and Inflation “Why monetary policy is tricky” (Money growth) > (Economic growth) Inflation (Money growth) < (Economic growth) Deflation Getting this right is tricky 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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2 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 Discount Rates Banks can borrow reserves from the Fed
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