Unit Four: Monetary Policy

Goals Explain the three tools of monetary policy. Discuss the impact of the FED’s actions with the money supply and how that changes interest rates and GDP.

I. Functions of the FED Provide Financial Services “Banker’s Bank” Holds reserves, clears checks, provides cash, transfers funds for commercial banks. Operates as the banker for the federal government. Supervise and Regulate Ensures safety and soundness of the banking and financial system. District banks collect information and regulate the banks within their region.

Stability of the Financial System I. Functions of the FED Stability of the Financial System Maintain integrity of the financial sector. Provide liquidity to financial institutions. Monetary Policy Influences the money supply as an indirect approach to manipulating private sector investment. Thateconguy video: https://www.youtube.com/watch?v=h3WJSYx0XyQ

II. Tools of the FED The Reserve Requirement Minimum amount required of banks to keep of checkable deposits within their reserves. Been 10% since 1994. Not often used. The Discount Rate The interest rate the Fed charges on loans. Manipulates to either encourage or discourage private institutions from borrowing. Open Market Operations Buying and selling of government securities Bonds, bills, or notes. Most often used tool. Federal Funds Rate: the interest rate determined in the federal funds market. Discount Window: place where commercial banks can borrow funds for reserves. Carried out by the New York District Bank and discussed by the FOMC

III. Review 1. Which of the following is a function of the Federal Reserve System? Examine commercial banks Print Federal Reserve notes Conduct monetary policy I only II only III only I and III only I, II, and III only D

III. Review 2. Which of the following financial services does the Federal Reserve provide for commercial banks? Clearing check Holding Reserves Making loans I only II only III only I and II I, II, and III E

III. Review 3. When the Fed makes a loan to a commercial bank, it charges No interest The prime rate The federal funds rate The discount rate The market interest rate D

III. Review 4. If the Fed purchases US Treasury bills from a commercial bank, what happens to bank reserves and the money supply? Bank reserves increases, money supply decreases Bank reserves increases, money supply increases Bank reserves decreases, money supply decreases Bank reserves decreases, money supply increases Bank reserves increases, money supply sees no change B

III. Review 5. When banks make loans to each other, they charge the Prime rate. Discount rate. Federal funds rate. CD rate. Mortgage rate. C