What are the tools of monetary policy?

The Federal Reserve’s three instruments of monetary policy are open market operations, the discount rate and reserve requirements.

Open market operations involve the 6____ and 7____ of government securities. The term “open market” means that the Fed doesn’t decide on its own which 8_______ dealers it will do business with on a particular day. Rather, the choice emerges from an “open market” in which the various securities 9______ that the Fed does business with – the primary dealers – compete on the basis of price. Open market 10________ are flexible, and thus, the most frequently used tool of 11_______ policy.

The discount rate is the interest rate 12_____ by Federal Reserve Banks to depository institutions on short-term loans.

Reserve requirements are the portions of 13______ that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank.

b) Read more information about Five Tools of Monetary Policy. Choose from the paragraph A-H the one which fits each gap 1-8.

A. inflation targeting

B. including bank loan rates and mortgage rates.

C. so it is safe for the banks to lend most of it out.

D. which tells banks how much of their money they must have on reserve each night

E. because it requires a lot of paperwork

F. because people are more likely to buy now if they know prices are rising.

G. because the Fed prefer banks to borrow from each other.

H. without changing the reserve requirement.

 

All central banks have three tools of monetary policy in common. Most have many more. They all work in an economy. This is done by managing banks' reserves.

The Fed has five such major tools. First, it sets a reserve requirement, 1 ____. If it weren't for the reserve requirement, banks would lend 100 percent of the money you've deposited. Not everyone needs all their money each day, 2_____

The Fed requires that banks keep 10 percent of deposits on reserve. That way, they have enough cash on hand to meet most demands for redemption. When the Fed wants to restrict liquidity, it raises the reserve requirement. The Fed only does this as last resort 3 ________

It's much easier to manage banks' reserves using the Fed funds rate.

This is the interest rate that banks charge each other to store their excess cash overnight. The target for this rate is set at the eight Federal Open Market Committee (FOMC) meetings. The Fed funds rate impacts all other interest rates, 4______

The Fed's third tool is its discount rate. That's it charges banks to borrow funds from the Fed's fourth tool, the discount window. The FOMC usually sets the discount rate a percentage of a point higher than the Fed funds rate. That's 5 ______

Fifth, the Fed uses open market operations to buy and sell Treasuries and other securities from its member banks. This changes reserve amount that banks have on hand 6 ________

Sixth, many central banks including the Fed use 7 _______. It clearly sets expectations that they want some inflation. That's 8 ________

Work in pairs. Take turns and react to your partner’s statements about the most important components and tools of monetary policy. Try and keep the conversation for 2-3 minutes.

10. Prepare a report in the form of a presentation on one of the following topics:

1. Types of monetary policy.

2. Traditional tools.

3. Behavioral monetary policy.

4. Interaction between monetary and fiscal policies.

5. Monetary reform.

6. Negative interest on excess reserves.

Writing

11. Fill in the table. Use the text of Ex.8 b) about Five Tools of Monetary Policy.Search the Internet for more detail, definition, and effect of monetary policy. Be ready to comment upon the found information.

	definition	effect
1. a reserve requirement
2. an open market operations
3. the interest rate
4.the discount rate
5.inflation targeting

Write the summary of the text (250 words). Use the active vocabulary of the unit.

To write a summary, use your own words to express briefly the main idea and relevant details of the piece you have read. What was it about and what did the author want to communicate?

Translate into English.

1. Основной задачей центральных банков является управление инфляцией

2. Часто центральные банки, по крайней мере теоретически, независимы от тех кто принимает экономические решения.

3. Кредитное смягчение - это инструмент нетрадиционной денежно-кредитной политики, включающий покупку активов частного сектора для того чтобы повысить ликвидность акций.

4. Когда проценты по займам низкие, фирмы набирают больше кредитов, чтобы инвестировать в расширение бизнеса.

5. Те, кто принимает экономические решения, также управляют рисками в банковской системе, обязательно оставляя денежные резервы, которые банки должны держать под рукой.

6. Сдерживающая денежно-кредитная политика замедляет темпы роста денежной массы или резко уменьшает её, чтобы контролировать инфляцию.

7. Стимулирующая денежно-кредитная политика увеличивает денежную массу, чтобы снизить уровень безработицы и стимулировать потребительские расходы.

8. Денежно-кредитная политика поддерживается покупкой или продажей государственных облигаций и изменением количества денег, которые банки обязаны хранить в хранилище.