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Macroeconomic Notes 3-26-08

Macroeconomic Notes 3-26-08 - These Rates are important...

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Macroeconomic Notes 3-26-08 Tools of Monetary Policy: 1. Federal Reserve can change interest rates which affects the change in interest rates. 2. Open market Operations which affects the change in the supply of money 3. Reserves Requirements which affects the change in reserves. Each Tool in Turn: 1. Open Market Operations: Federal Reserve can do the buying (increase) and selling (decrease) of treasury securities. Primary use of this is to manage but can be used for stimulating to put a big chunk of money into system or restraining to pull a big chunk of money out of the system. 2. Change in the Interest Rate a. Discount Rate – the rate that the federal reserve charges the bank on the money they lend out. b. Federal Funds Rate – the rate which is charged on interbank loans. If you don’t want to borrow from the federal reserve. 3. Reserve Requirements:
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Unformatted text preview: These Rates are important because 1. most financial institutions will base their primary based on what is happening on the federal funds. Key rate in determining other rates. Monetary works very well against inflationary pressures but has it’s problems in terms of recessionary pressures. Secondary Tools: - Moral Suasion – better behave and act good or else punishment will arise.- Reserve Requirements on Credit Cards (never been used). Number on credit card debt would be very high which is why it’s never been used.- Control on Margin Relay – buy things at only fraction of a cost. - Call loans – broker calls owner of stock and says you need to invest more money & investor says I don’t have it and then this results in the broker telling them to sell the stock. MV = total spending PQ = total production...
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