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II. The Conduct of Monetary Policy

IV. Financing International Trade | I. Aggregate Supply | II. Aggregate Demand | The Business Cycle | I. Fixed Prices and Expenditure Plans | II. Real GDP with a Fixed Price Level | III. The Multiplier | IV. The Multiplier and the Price Level | II. Supply-Side Effects of Fiscal Policy | III. Generational Effects of Fiscal Policy |


Читайте также:
  1. II. Supply-Side Effects of Fiscal Policy
  2. III. Exchange Rate Policy
  3. III. Generational Effects of Fiscal Policy
  4. IV. Extraordinary Monetary Stimulus

The Monetary Policy Instrument

A monetary policy instrument is a variable that the Fed can directly control or closely target.

· An Open Market Purchase: The Fed buys government securities from a bank and pays for the purchase by increasing the bank’s reserves. The supply of reserves increases.

· An Open Market Sale: The Fed sells government securities to a bank and receives payment for the sale by decreasing the bank’s reserves. The supply of reserves decreases.

· If the Fed wants to lower the federal funds rate, the Fed undertakes an open market purchase of government securities. The quantity of reserves increases and the federal funds rate falls.

· If the Fed wants to raise the federal funds rate, the Fed undertakes an open market sale of government securities. The quantity of reserves decreases and the federal funds rate rises.

FOMC Decision Making and the Market for Reserves

After assessing the current state of the economy using the Beige book (which is now online), the Fed turns to forecasting three key variables: the inflation rate, the unemployment rate, and the output gap. Based on those forecasts, The FOMC formulates its monetary policy and decides upon its target federal funds rate. The FOMC instructs the New York Fed to use open market operations—the purchase or sale of government securities in the open market—to hit its federal funds target rate.


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