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Federal Reserve & Supply of Money

  • Discount rate is a rate at which banks can borrow reserves from the fed.
  • Lower Discount rate => increased money supply, decreased interest rates.
  • Higher rates => decreased money supply & increase interest rate.
  • Reserve Requirement: Higher %age reduces the money supply & increases interest rates; lower %age increase the money supply & decreases interest rates.
  • Opening market operations: Fed buying & selling of treasury securities. Fed purchases increase cash available for lending, decreasing interest rates. Fed sales remove cash, increasing interest rates
  • Fed’s balance sheet:
  1. Assets: Gold, deposit with other central banks, IMF special drawing rights; Treasury securities; loans to bank at the discount rate.
  2. Liabilities: U.S. currency in circulation; banks reserve deposits.

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