Monetary Policy

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Money

Back 1

anything that is generally accepted as final payment for goods and service

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Barter

Back 2

exchange of a product of value for another product of value.

For example. a person who lays carpet can exchange his service of laying carpet for a plumber fixing a leak in his house.
So plumber gets new carpet; and carpet layer gets his plumbing fixed

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Fiat

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Monetary standard ; what we will all accept by gov't decree

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Monetary Standard

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dollar $$$

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Purposes of Money

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1. Medium of exchange - can be used to purchase goods and services.

2. Unit of account - can be used to compare the value of different goods and services

3. Store of Value - it can be held or saved to buy something in the future

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Money Supply

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currency and coins in the hands of the public and anything we can use to buy goods and services

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Money Supply (price stability)

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supply of money in the economy is important for price stability and economic growth

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Inflation

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too much money can cause inflation

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Great Depression

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too little money can lead to falling prices and falling production. (1929-1933 suppply fell 30% and most economists agree that too little money was a major cause of the great depression.

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Federal Reserve System

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12 district banks, each INDEPENDENT of others to prevent too much

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Central Bank

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called The Fed

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Federal Reserve System Independent BAnks Locations;

DISTRICT BANKS

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Atlanta, San Francisco, New York, Boston, Philadelphia, Richmond, St. Louis, Kansas City, Minneapolis, Chicago, Dallas, Board of Governers are located in Washington DC

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District banks

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owned by member banks NOT the gov't.

all national banks are members

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District Banks Officers

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appointed by the president and approved by the senate

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Structure of the Fed

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Board of Governers - 7 members appointed by president for 14 year non- renewable term

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Structure of FED

7 members

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1. Confirmed by Senate (rotte every 2 years)
2. set the general policy of FED

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Chairman of the Fed

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Ben Bernanke - appointed by George W. Bush and confirned by Senate in 2006

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FOMC

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Federal Open Market Committee

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FOMC - Federal Open Market Committee

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makes decisions about the growth of :

1. money supply
2. level of interest rates

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FOMC Members

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1. president
2. (7) seven members of board of governors
3. twelve (12) district banks

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FOMC members meetings (page 1)

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Meet (8) times a year
1. Jan 25
2. March 15
3. April 26
4. June 21

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FOMC members meetings (page 2)

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5. Aug 9
6. Sept 20
7. Nov 1
8. Dec 13

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Functions of the Fed

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MAIN FUNCTION - monetary policy
other functions
1. Oversee other banks
2. Check clearinghouse
3. Print Money - maintain the currency

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Monetary Policy

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controlling the expansion and/or contraction of the money supply to influence the cost and availability of credit (interest rates)

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Monetary Policy (2)

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1. to promote economic growth

2. MAINTAIN STABLE PRICES
3. FULL employment

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Fractional Reserve Banking System

Reserve

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all banks are required to maintain a percentage of al deposits in "reserve" and not lend the reserves out (have to keep)

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Fractional Reserve Banking System

Goals of Monetary Reserve

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Easy Money - expansionary policy

Money supply grows and interest rates fall

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Tight Money

CONTRACTIONARY POLICY

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restrict the growth of the money supply and interest rates go up

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Tools of the Fed (how they do it)

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1. Open Market Operations
2. Discount Rate (Fed lend to banks)
3. Federal Funds Rate (bank rate lent to another bank ; bank to bank)
4. Reserve requirements

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Open Market Operations
(what is it)

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the buying and selling of govt bonds (securities) by the federal reserve to control the bank reserves and the money supply

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Purpose of the Monetary Policy

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1. to increase the availability of money the Fed buys gov't bonds

2. Tighten the availability of money the Fed sells bonds

3. Used daily

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DISCOUNT RATE

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the rate of interest that the Fed charges financial institutions to loan them money

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CHANGE IN DISCOUNT RATE

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a change in discount rate can either inhibit or encourage financial institutions lending and investment activities by making it more or less expensive to borrow meony

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Federal Funds Rate

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interest rate that banks/credit union ( lends available funds to another bank/credit union (same as depository institution)

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Depository Institution

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banks, credit unionsw

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Reserve Requirement

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the fraction of banks deposits that banks are required to keep and NOT loan out

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RESERVE REQUIREMENT

Lower reserve requirement

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banks ca loan out a higher percentage of deposits

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RESERVE REQUIREMENT

Higher reserve requirement

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banks must keep higher rpercenage of deposits in vault

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RESERVE REQUIREMENT

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the requirements do not change lot

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TIGHT MONEY POLICY

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When inflation is a problem, the Fed can decrease the money supply

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How does fed decrease teh money supply
(TIGHT MONEY POLICY)

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1. Raising the discount rate
2. Raising the reserve
3. selling gov't bonds

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TIGHT-mONEY

CONTRACTIONARY
Less Money in Circulation

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1. interest rates will rise
2. borrowing will decrease
3. affreate demad will fail
4. price level falls
5. GDP decreases

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EASY-MONEY POLICY

EXPANSIONARY

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fed increase money supply during unemployment and recession

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EASY-MONEY POLICY

EXPANSIONARY
How does Fed increase money supply

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1. Lowering the discount rate
2. lowering the reserve requirement
3. buying gov't bonds

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EASY-MONEY POLICY

EXPANSIONARY

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with more money in curculation,
1. interest rates will fall,
2, borrowing will increase
3. aggregate demand will increase
4. prices will rise
5. GDP will increase
6. More jobs will become available

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Economy Needs a Boost

EXPANSIONARY POLICY

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Gov't
1. BUYS bonds
2. Lower interest rates
3. decrease the reserves

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Economy Needs Cooling Off

CONTRACTIONARY POLICY

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Gov't
1. Sell Bonds
2. raise interest raes
3. increase reserve requirements