Review

Since November 1978, when the Treasury changed its cash management procedures, the Federal Reserve has been faced with less uncertainty in managing the week-to-week volume of bank reserves. Weekly swings in the Treasury’s balances at Federal Reserve Banks have been smaller, and the decreased volatility of these balances has reduced the Federal Reserve’s uncertainty about reserve positions. 

This article analyzes the causes of the 1979 slowdown in economic activity with the use of a simple supply and demand framework. The analysis is kept simple to demonstrate that models of the economic system need not be large and complex in order to give a general picture of the forces that produce changes in output and the price level.