Monetary Policy Monetary Policy This is key!! 2nd option the federal government has to influence the economy. This is key!! All monetary policy is controlled by the Federal Reserve system. Aka “The Fed Reserve”

The Fed Reserve What is the Fed Reserve? The central banking system in the United States. What does it do? It controls how much money is in circulation. How? Loans money to the banks in America.

How the Fed Reserve works Fed Reserve has a Board of Governors 7 members vote on what interest rates to put on loans to banks in America. Leader is Ben Bernanke. Fed Reserve Chairman

Fed Reserve Districts The Fed Reserve has district banks These district banks oversee all banks in their area.

Making Monetary Policy Fed Reserve has 3 tools to implement monetary policy: Reserve requirements The discount rate Open market operations

Reserve Requirements The Fed Reserve sets the requirements (rules) for banks in the U.S. Most important rule: Determining the minimum amount of money that a bank must keep on hand at all times! Keeps you from not getting your money. What happens if everyone wants their money at the same time? FDIC (Federal Deposit Insurance Corporation) Guarantees your money up to $250,000

Discount Rate Discount rate The interest rate that the Fed Reserve charges banks to get money. Why does the Fed Reserve charge interest to banks? Keep them from asking for lots of money. Banks won’t want to take as much if they have to pay large interest on it. Example: If a bank wants $15 million to loan out, the Fed will charge them 10% interest. This forces banks to charge higher interest rates for loans to the consumer. Who is going to take a loan with higher interest rates?

Open Market Operations Purchase or sale of bonds in order to finance the operations of government. Bonds Certificates issued by government to a lender from whom it has borrowed money. How does it work? Pay $500 now Wait 10 Years Get $1000 back!

Negatives to monetary policy It takes a long time to take effect! Bonds must be sold! Can be done quickly!!! Unless people are skeptical and decide to save their money. Loans take time to be passed out. Too long! Need money now!