Why does the Fed use open market operations as its principal tool of monetary management, rather than changes in the required reserve ratios, or changes in the discount ratio?
What are the differences in the effects that each technique would have on individual banks, on the commercial banking system as a whole, and on te money supply?
2007-03-24 15:26:19 · 4 answers · asked by Temi O 1 in Social Science ➔ Economics
Changes in reserve requirements would cause serious liquidity problems.
For example, suppose the current reserve ratio is 10%, and the Fed wanted to increase rates so they raised the ratio to 12%.
The banks would have to nearly entirely stop loaning money in order to quickly build reserves. If the Fed wanted to lower rates the opposite would be true.
By using open market operations, the Fed can cause rates to change first, and then banks change their lending/savings requirements to stay at the same reserve requirement.
2007-03-27 02:03:46 · answer #1 · answered by Anonymous · 0⤊ 0⤋
The Open Market has the following advantages...
1) It is very fast to implement
2) It has a very fast effect on the economy
3) It is easy to reverse direction.
4) it has wide reaching effects
5) it effects all banks and S&Ls the same.
6) Does not change the M1 money supply
changes in the required reserve ratios? By comparision...
1) It is VERY SLOW to implement
2) It has a Slow on the economy
3) It is hard to reverse direction.
4) it only can be done by lending more money
5) it requires specific policy changes for each type of instituition. S&L and Banks have different policy systems.
6) Would allow banks and S&Ls to change the M1 money Supply rather than the Fed Directly.
changes in the discount ratio? This would work it only effect banking and not S&Ls
1) It is very fast to implement
2) It has a very fast effect on the economy
3) It is easy to reverse direction.
4) it has wide reaching effects
5) it does not effects all banks and S&Ls the same.
6) Would concentrate its effect in compercial banking. Especially interbank loans
7) Has no impact on M1 Money Supply
What are the differences in the effects that each technique would have on individual banks, on the commercial banking system as a whole, and on te money supply?
2007-03-24 15:37:03 · answer #2 · answered by gator_ce 5 · 1⤊ 0⤋
changes in the reserve ratio would be far too problematic to implement with untested results.
2007-03-24 15:29:27 · answer #3 · answered by want2no 5 · 0⤊ 0⤋
ask ur instructor
2007-03-24 15:29:23 · answer #4 · answered by chrishomingtang 3 · 0⤊ 0⤋