March 31, 2017

1. Reserved Requirement 
2. Open Market Operation 
3. Discount Rate 

What is a Reserves Requirement?

• If you have a bank account, where is your money?
• Only a small percent of your money is in the safe, the rest if your money has been loaned out.
• The FED sets the amount that banks must hold 
• The reserve requirement (reserve ratio) is the percent of deposits that banks must hold in reserve (the percent they CANNOT loan out) 

What is a Bank Deposit?

• It is when someone (public or private) deposits money in the bank.
• Banks keeps some of the money in reserve & loans out their excess reserves 

How to use reserve requirements?

1. If there is a recession, what would the FED do to reserve requirement?
• Decrease the reserve ratio 
1. Banks hold less money & have more excess reserves 
2. Banks create more money by loaning out excess 
3. Money supply increases, interest rates fall, AD goes up 
2. If there is an inflation?
•