Econ Notes: Monetary Policy cont'd

Fiscal Policy is controlled by Congress
Monetary Policy is controlled by the Federal Reserve Bank (Fed)
 -monetary policy is influencing the economy through changes in reserves which influence money supply and the availability of credit

4 Options of Monetary Policy

1. Reserve Requirement: percent set by the fed of the minimum reserves that the bank must keep
2. The Discount Rate: the rate of interest that the fed charges for loans to commercial banks
3. Federal Fund Rate: banks borrow overnight loans from other banks
4. OMO (Open Market Operation): buying or selling securities/bonds
• If the fed BUYS bonds --> expands money supply
• If fed SELLS bonds --> decrease money supply

	Expansionary (Easy Money)	Contractionary (Tight Money)
Government Bonds / Securities	Buy  (“Buy Bonds = Big Bucks”)	Sell
Reserve Requirement	↓	↑
Discount Rate: interest rate that Fed charges banks when loaning to banks	↓	↑

*If discount/federal fund rate decrease, it is expansionary monetary policy. If increasing, it is contractionary monetary policy
Prime Rate: interest rate that banks charge their most credit-worthy customers