Actions of the Federal Reserve Monetary Policy Actions of the Federal Reserve

Functions of Money Why do we need money? Money is a: Medium of exchange Allows the purchase of goods and services Store of Value Function that allows money to hold its value over time Unit of account/standard of value Allows sellers to set common prices for goods

Who is in charge of our money? The United States Treasury and Mint PRINT our money The US Federal Reserve distributes our money

Federal Reserve Structure Board of Governors Federal Open Market Committee Federal Reserve Banks Member Banks American People Securities Agencies

What is Monetary Policy? Actions that influence the amount of money and credit in the economy Goal: to promote price stability and full employment

Types of Monetary Policy Easy Fixes problem of unemployment Puts money into the economy More money = more spending Tight Fixes problem of inflation Takes money out of the economy Less money = less spending

Open Market Operations Monetary Policy Tools Tools Discount Rate Open Market Operations Reserve Requirement Interest on reserves

Monetary Policy Tools Open Market Operations Reserve Requirement buying and selling of government treasury bonds Reserve Requirement percentage of customer deposits banks are required to keep on hand. Discount Rate interest rate the Fed charges banks for loans Interest on Reserves Interest the Federal Reserve is required to pay banks for the reserves they hold

Effect of prices, GDP & unemployment Tool Action When used? Effect on money supply Effect of prices, GDP & unemployment Open Market Operations Reserve Requirement Interest on Reserves Discount Rate

Effect of prices, GDP & unemployment Tool Action When used? Effect on money supply Effect of prices, GDP & unemployment Open Market Operations Buy bonds on the open market During contractions in the business cycle Increases money supply Prices rise GDP rises Unemployment falls Sell bonds on the open market During inflation Decreases money supply Prices fall GDP falls Unemployment rises Reserve Requirement Increase the reserve requirement Decrease the reserve requirement During contraction in the business cycle

Effect of prices, GDP & unemployment Tool Action When used? Effect on money supply Effect of prices, GDP & unemployment Interest on Reserves Increase interest rates on reserves During inflation Decreases the money supply Prices fall GDP falls Unemployment rises Decrease interest rates on reserves During a contraction in the business cycle Increases the money supply Prices rise GDP rises Unemployment falls Discount Rate Increase the discount rate Decrease the discount rate