Free Republic
Browse · Search
News/Activism
Topics · Post Article

To: Moonman62
Federal Reserve policy is the most important determinant of the money supply. The Federal Reserve affects the money supply by affecting its most important component, bank deposits.

Here's how it works. The Federal Reserve requires commercial banks and other financial institutions to hold as reserves a fraction of the deposits they accept. Banks hold these reserves either as cash in their vaults or as deposits at Federal Reserve banks. In turn, the Federal Reserve controls reserves by lending money to banks and changing the "Federal Reserve discount rate" on these loans and by "open-market operations." The Federal Reserve uses open-market operations to either increase or decrease reserves. To increase reserves, the Federal Reserve buys U.S. Treasury securities by writing a check drawn on itself. The seller of the Treasury security deposits the check in a bank, increasing the seller's deposit. The bank, in turn, deposits the Federal Reserve check at its district Federal Reserve bank, thus increasing its reserves. The opposite sequence occurs when the Federal Reserve sells Treasury securities: the purchaser's deposits fall and, in turn, the bank's reserves fall.

What Is the Money Supply?

58 posted on 07/27/2005 9:49:42 PM PDT by Toddsterpatriot (If you agree with Marx, the AFL-CIO and E.P.I. please stop calling yourself a conservative!!)
[ Post Reply | Private Reply | To 57 | View Replies ]


To: Toddsterpatriot

Are you trying to imply that the Fed uses the Discount Window as the primary means to adjust the money supply? That's not true today, and it especially wasn't true in 1999/2000.


68 posted on 07/28/2005 7:48:03 AM PDT by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
[ Post Reply | Private Reply | To 58 | View Replies ]

Free Republic
Browse · Search
News/Activism
Topics · Post Article


FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson