question archive Why did the U
Subject:EconomicsPrice:2.88 Bought3
Why did the U.S. Federal Reserve, prior to the 2008 financial crisis, use changes to the Federal Funds rate (via open market operations) more often than changes to the minimum reserve ratio, or to the Discount Rate to affect money supply?
The Federal Reserve uses federal funds rate via open market operations more often than changes to the minimum reserve ratio or discount rate to affect money supply because if the federal funds rate is greater than the federal target then the Federal Reserve buys the government securities in the open market which injects reserve into the system of banking in such a way that the money supply increases in an economy. And, if the federal funds is less than the federal target then the Federal Reserve sells the government securities in the open market which keeps the reserve with the banks in such a way that the money supply decreases in an economy.