Unit 4 April 3

• Tools of Monetary policy and 3 sifters of money supply 
• reserve requirement 
• open market operation
• discount rate 
• Reserve requirement- the dollar amount that must be kept back 
• the FED sets the amount that banks must hold 
• if there is a recession the FED has to decrease the reserve ratio
• if there is an inflation the FED has to increase the reserve ratio
• Open Market Operation- when the FED buys or sells government bonds 
• this is the most important and widely used monetary policy 
• if the fed buys bonds-it takes bonds out of the economy and replaces them with money.
• if the fed sells- bond it takes money and gives the securities to investors 
• Discount rate- the interest rate that the fed changes commercial banks for short term loans
• Federal Funds Rate- The interest rate that banks charge one another for overnight loans 
• prime rate- the interest rate that banks charge their most credit worthy customers