Home » The Monetary System
The Monetary System
The Discount Rate The third tool in the Fed’s toolbox is the discount rate, the interest rate on the loans that the Fed makes to banks. A bank borrows from the Fed when it has too few reserves to meet its reserve requirements. This might occur because the bank...
The Monetary System
Reserve Requirements The Fed also influences the money supply with reserve requirements, which are regulations on the minimum amount of reserves that banks must hold against deposits. Reserve requirements influence how much money the banking system can create with...
The Monetary System
Open-Market Operations As we noted earlier, the Fed conducts open-market operations when it ·buys or sells government bonds. To increase the money supply, the Fed instructs its bond traders at the New York Fed to buy bonds from the public in the nation’s bond...
The Monetary System
THE FED’S TOOLS OF MONETARY CONTROL As we have already discussed, the Federal Reserve is responsible for.controlling the supply of money in the economy. Now that we understand how fractional-reserve banking works, we are in a better position to under stand how...
The Monetary System
THE MONEY MULTIPLIER The creation of money does not stop with First National Bank. Suppose the borrower from F national uses the $90 to buy something from someone who then deposits the currency in Second National Bank. Here is the T-account for Second National Bank:...
The Monetary System
MONEY CREATION WITH ‘FRACTIONAL RESERVE BANKING Eventually, the bankers at First National Bank may start to reconsider their policy of lOO- percent-reserve banking. Leaving all that money idle in their vaults seems unnecessary. Why not lend some of it out...
