Section 9.3

Monetary Aggregates

• M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money.
• M3 expands upon M2 by adding large time deposits, institutional money market funds, and other larger liquid assets.

Federal Reserve Actions and Interest Rates

• Buying securities by the Federal Open Market Committee (FOMC) typically leads to decreasing interest rates, not increasing.
• Raising reserve requirements means banks must hold more capital on hand, which reduces the funds available for lending, likely increasing interest rates.
• Raising the discount rate, the interest rate at which banks can borrow from the Federal Reserve, generally leads to higher interest rates throughout the economy.
• Raising the prime rate indicates an increase in the cost of borrowing for consumers and businesses, resulting in higher overall interest rates.

Interest Rate Determination

• The Federal Reserve sets the discount rate, influencing other interest rates in the economy indirectly.

Establishment of the Federal Reserve

• The Federal Reserve Board was established by the Federal Reserve Act of 1913 to provide the country with a safer and more flexible monetary and financial system.

Test your knowledge on monetary aggregates by identifying what is added to M2 to arrive at M3.