The Fed uses open market operation to control the amount of money that is created by the banking system.
1. Explain how banks create money under a fractional reserve banking system.
2. Define the term open market operation.
3. Describe how the Fed pays for the government securities that it buys.
4. Explain how the Fed uses open market operations to increase the money supply.
5. Explain how the Fed uses open market operations to decrease the money supply.
6. Write the formula used to calculate the maximum amount of new money that may be created from any new money.
7. Explain what might limit the banking system’s ability to create money.