Interest Rate Determination
Completion requirements
Here, you will learn about determining interest rates and how supply and demand play a role in determining interest rates. Pay attention to the Fed's role in this determination and to the effects of the increase of money supply on interest rates. What are the determinants of interest rates?
Controlling the Money Supply
Key Takeaways
- When the Federal Reserve Bank (a.k.a. "Federal Reserve," or more informally, "the Fed") purchases bonds on the open market it will result in an increase in the U.S. money supply. If it sells bonds in the open market, it will result in a decrease in the money supply.
- When the Fed lowers the reserve requirement on deposits, the U.S. money supply increases. When the Fed raises the reserve requirement on deposits, the money supply decreases.
- When the Fed lowers its target federal funds rate and discount rate, it signals an expanded U.S. money supply and lower overall interest rates.
- When the Fed raises its target federal funds rate and discount rate, it signals a reduced U.S. money supply and higher overall interest rates.