Step 26: Tools of Monetary Policy

Tools of Monetary Policy

Fiscal Policy

• controlled by Congress and the President
• tax created by spending

Monetary Policy

• controlled by the FED and the federal reserve bank
• Open Market Operation
• Discount Rate
• Federal Fund Rate
• Reserve Requirement

Monetary Policies

• Open Market Operations (OMO)

• to buy or sell securities (bonds)
• Expansionary (recession, "easy money")
• buy bonds
• money supply would increase
• Contractionary (inflation, "tight money")
• sell bonds
• money supply would decrease

• Discount Rate

• interest rate that the FED charges banks for taking out loans
• Expansionary
• decrease in interest rate
• Contractionary
• increase in interest rate

• Reserve Requirement

• percentage or amount the bank has to hold and keep in reserve
• Expansionary
• decrease in required reserves
• Contractionary
• increase in required reserves

• Bank Reserves & Money Supply have a direct relationship.