Fractional Reserves and Monetary Expansion
 Allows money supply to grow beyond reserves
 Loans
 Banks receive a deposit, put amount into reserves
 Loan out the rest
 If person taking loan takes it as a DDA, bank can loan out
more money
 Formula for figuring
possible money supply
 Total Reserves /
Reserve Requirement =
Money Supply
Changes in Money Supply
 If people withdraw money, money supply is
changed
 New formula is used
 ▲Reserves = Reserve Requirement x
▲Money Supply
Tools of Monetary Policy
 Tools impact amount of reserves in the system
 Impacts monetary expansion process
 Easy Money Policy
 Fed allows money supply to grow
 Interest rates fall
 Helps stimulate economy
 Tight Money Policy
 Restricts growth
 Increases interest rates
 Slows economic growth
Tools of Monetary Policy
 Reserve Requirement
 Fed can change this rate
 Lower reserve requirement, more money can be
loaned
 Open Market Operations
 Buying and selling of government securities in
financial markets
 Operations conducted by Federal Open Market
Committee
 Set targets, tell trading desk to take over
Tools of Monetary Policy
 Discount Rate
 Give loans to other institution at a lower rate
 2 reasons a bank would request a loan
 Keep reserves steady
 Seasonal demands
 Discount window – teller’s window banks use to
request funds
 Deposit collateral
 Loan is shown as increase in MBR
 Both member and non-member banks can borrow
from the Fed
Other Tools of Monetary Policy
 Moral Suasion
 Use of persuasion to
impact people’s opinion
of economy
 Selective Credit Controls
 Rules pertaining to loans
for specific commodities
or purposes
 Seldom used today