Chapter Preview
• We examine how the conduct of monetary policy affects the money supply and interest rates. We focus primarily on the tools and the goals of the
U.S. Federal Reserve System, and examine its historical success. Topics include:
– The Federal Reserve’s Balance Sheet
– The Market for Reserves and the Federal Funds Rate
– Tools of Monetary Policy
Chapter Preview (cont.)
– Discount Policy
– Reserve Requirements
– Monetary Policy Tools of the ECB
– The Price Stability Goal and the Nominal
Anchor
– Other Goals of Monetary Policy
The Federal Reserve’s Balance Sheet
The conduct of monetary policy by the Federal
Reserve involves actions that affect its balance sheet. This is a simplified version of its balance sheet, which we will use to illustrate the effects of
Fed actions.
Open Market Operations
In the next two slides, we will examine the impact of open market operation on the Fed’s balance sheet and on the money supply. As suggested in the last slide, we will show the following:
– Purchase of bonds increases the money supply
– Making discount loans increases the money supply
Naturally, the Fed can decrease the money supply by reversing these transactions.
