Summary
Highlights
The video introduces the three shifters of the money supply: the reserve ratio, the discount rate, and open market operations.
Open market operations are the most important tool the FED uses. When the FED buys bonds, the money supply increases ('buy big'). When the FED sells bonds, the money supply decreases ('sell small'). Buying bonds from commercial banks gives them money, increasing the money supply. Selling bonds to commercial banks takes money out of the system, decreasing the money supply.
The discount rate is the interest rate the FED charges commercial banks to borrow money. Decreasing the discount rate makes it cheaper for banks to borrow, increasing the money supply. Increasing the discount rate makes it more expensive, decreasing the money supply.
The reserve requirement is the percentage of deposits banks must hold in reserve by law. Lowering the reserve requirement allows banks to loan out more money, increasing the money supply. Raising the reserve requirement means banks loan out less money, decreasing the money supply.
The FED can manipulate these three tools to change the money supply, which in turn affects interest rates and aggregate demand.