Monetary Policy Impact On Macroeconomics Essay
The Fed's the most important tool is the open-market operations. The open-market operations deal with buying or selling government bonds to commercial banks or to the public. When the Fed buys bonds from commercial banks, the commercial bank will have negative securities and positive reserves in …show more content…
The Discount Rate
Another tool the Fed uses is the discount rate. The discount rate is the interest rate that the Fed charges commercial banks for loans. Just as the commercial banks charge the public interest rates for borrowing money, the Fed will charge the commercial banks a discount rate for borrowing money. Borrowing funds from the Federal Reserve Bank by the commercial banks increases the reserves of the commercial banks and enhances their ability to extend credit (McConnell & Brue, 2004, p. 247). When the discount rate is increased, commercial banks will look to other commercial banks for loans and not the Federal Reserve Bank.
Affects on Macroeconomic
When the economy is facing recession or high unemployment the Fed must buy government bonds, lower the reserve ratio, or lower the discount rate. Excess reserves will increase causing the money supply to rise. Interest rates will fall causing investment spending to increase. The aggregate demand will increase causing real GDP to rise