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Chapter Review Chapter 32: The Federal Reserve and Interest Rates

  1. The federal funds market is the market in which banks can borrow or lend reserves.
  2. The federal funds rate, which is the interest rate on overnight interbank loans, adjusts to balance the supply and demand for reserves.
  3. The Federal Reserve can affect the market for reserves by changing the reserve requirement, by changing the discount rate, or by open market operations.
  4. Open market operations are the chief tool used by the Fed to affect the market for reserves. By controlling the supply of reserves, they enable the Fed to achieve the target for the federal funds rate set by the FOMC.
  5. Under a money supply operating procedure, open market operations can be used to achieve a target for the money supply. Because the speed with which money circulates in the economy (and therefore the optimal money supply) has become less predictable in recent years, most central banks implement policy by setting the nominal interest rate, an interest rate operating procedure.
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