LEARNING OBJECTIVES
After you have read this section, you should be able to answer the following questions:
What do banks do?
What are the tools of the Fed?
We have not yet said very much about exactly how the Fed changes interest rates. The Fed has three major tools at its disposal: open-market operations, the reserve requirement, and the discount rate. We discuss these in turn. Monetary policy operates through the Fed’s interactions with the banking system, so we first must make sure we understand what banks do in the economy. [***If your find this material interesting, a course on Money and Banking will delve much further into the details of how banks operate and how they interact with the monetary authority.***] Throughout this discussion, we use the credit market to think about how the Fed operates.
Toolkit: Section 16.4 "The Credit (Loan) Market (Macro)"
You can review the workings of the credit market in the toolkit.
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