Tools Of Monetary Policy393

Preview 393

The Market for Reserves and the Federal Funds Rate 393

Supply and Demand in the Market for Reserves 394

How Changes in the Tools of Monetary Policy Affect the Federal Funds Rate 395

Open Market Operations 398

A Day at the Trading Desk 398

Advantages of Open Market Operations 400

Discount Policy 400

Operation of the Discount Window 401

Lender of Last Resort 402

Advantages and Disadvantages of Discount Policy 403

Reserve Requirements 403

Box 1 Inside the Fed: Discounting to Prevent a Financial Panic:

The Black Monday Stock Market Crash of 1987 and the Terrorist Destruction of the World Trade Center in September 2001 404

Advantages and Disadvantages of Reserve Requirement Changes 405

Application Why Have Reserve Requirements Been Declining Worldwide? . . . .406

Application The Channel/Corridor System for Setting Interest Rates in

Other Countries 406

Summary, Key Terms, Questions and Problems, and Web Exercises 408

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