Understanding Monetary Policy What the Fed? Understanding Monetary Policy

The Fed is… The Federal Reserve System (Fed) is the Central Bank of the United States It uses MONETARY POLICY to influence the economy (stimulate or slow down) Controls money supply and interest rates (which makes getting money easier or harder)

Actions of the Fed To Stimulate the Economy To Slow Down the Economy Lower interest rates Increase the money supply Downside: inflation To Slow Down the Economy Raise interest rates Decrease the money supply Downside: potential unemployment & decrease in prices

Speculation Buy low and sell high to make profit “Flipping” real estate property, oil, gold, stocks When many people do it, artificially increases demand and value (ex: housing & gas) As a result, the thing is not worth nearly as much as it seems Problem: creates a “bubble” that will inevitably burst

Housing Bubble 1997-2006