Unit 4- Monetary Policy

Monetary Policy

• Open Market Operations (OMO): When the Fed buys or sells bonds
• Discount Rate (DR): where FDIC member banks and other eligible institutions may borrow short term loans directly from the Federal Reserve.
• Federal Funds Rate (FFR): Where FDIC member banks loan each other overnight funds.
• Prime Rate: Interest rate that banks charge to their most credit worthy customers.

Monetary is always conducted by the Fed, and only affects AD through investment spending.

In an recession, Fed uses expansionary monetary policy

• Actions taken by Fed:
• Open Market Operations: Buy bonds; MS increases
• Discount Rate: Lowered
• Reserve Requirement: Lowered
• Federal Funds Rate: Lowered

In an inflation, Fed uses contractionary monetary policy

• Actions taken by Fed:
• Open Market Operations: Sells bonds; MS decreases
• Discount Rate: Raised
• Reserve Requirement: Raised
• Federal Funds Rate: Raised