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Unit 2 Money and Regulation
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The BOG and the FOMC have three basic tools they use to conduct
monetary policy:
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monetary policy.
The FMOC supervises the purchase and sale of long-term loans
issued by the government to raise money. This is an application of the
open market operations tool.
The discount rate is the interest banks pay to borrow money from a
Federal Reserve Bank. This rate affects the interest rate that the banks
charge customers to borrow money. The FOMC sets the discount rate
every two weeks. The BOG then approves the new rate. The discount
rate is an important factor in monetary policy. Businesses borrow money
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in interest rate, either up or down, might affect the number of people a
business can afford to employ.
If your employer cannot afford to borrow money because interest
rates are high, it may need to reduce staff and your job may be cut. On
the other hand, if your employer can borrow money to grow the business
because interest rates are low, it may be able to hire more employees.
This is the effect the Fed can have on employment.
The discount rate also affects the interest you pay to purchase
something on credit, as shown in Figure 5-4. You and the businesses in
your area may borrow money from your local bank. If necessary, your
local bank borrows money from the Federal Reserve Bank in its district to
make the loan. The interest rate the bank charges you when you borrow
money is based on the discount rate charged by the Federal Reserve
Bank. The interest rate you pay is tied to the prime rate. The prime rate is
the interest rate that banks charge their best commercial customers.
Reserve requirements also play a big role in monetary policy. The
BOG sets the amount of money each bank must keep in its vaults or at a
Federal Reserve Bank. This value is rarely changed.
The Fed also dictates reserve requirements. A reserve requirement
is the amount of money a bank must keep and not invest or loan out. The
amount of the reserve requirement has a big impact on the money supply.
Bank Regulation and Supervision
All national banks and some state-chartered banks are members of
the Federal Reserve System. The Fed issues regulations that affect how
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