Tools of Monetary Policy

Goals of Monetary Policy Low inflation Low unemployment People who are actively trying to seek work who cannot find employment (non-farm) As of April 2013 Michigan rate: 8.8% Rising Real GDP (gross domestic product) Money value of all finished goods and services usually calculated annually

More on GDP GDP = C + G + I + NX "C" is equal to all private consumption, or consumer spending, in a nation's economy "G" is the sum of government spending "I" is the sum of all the country’s business spending on capital "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

Investopedia on GDP GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy - transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation’s productivity, which is unrelated. Estimated 2011 U.S. GDP: $15.094 trillion Estimated 2011 U.S. GDP per capita $48,442

The Money Supply Money supply is the stock of money available in the economy at particular period of time. People demand money for: Financial transactions To have as a store of value

Changing the Money Supply What Does Federal Open Market Committee - FOMC Mean? The branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC is composed of the Board of Governors, which has seven members, and five reserve bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other reserve banks rotate in their service of one-year terms.

More on the FOMC The FOMC meets eight times per year to set key interest rates, such as the discount rate, and to decide whether to increase or decrease the money supply, which the Fed does through buying and selling government securities. The meetings of the committee, which are secret, are the subject of much speculation on Wall Street, as analysts try to guess whether the Fed will tighten or loosen the money supply, thereby causing interest rates to rise or fall.

Tight Monetary Policy What Does Tight Monetary Policy Mean? A course of action undertaken by the Federal Reserve to constrict spending in an economy that is seen to be growing too quickly, or to curb inflation when it is rising too fast. The Fed will "make money tight" by raising short-term interest rates (also known as the Fed funds, or discount rate), which increases the cost of borrowing and effectively reduces its attractiveness. 

Loose Monetary Policy What Does Loose Monetary Policy Mean? A course of action undertaken by the Federal Reserve to increase spending in an economy that is seen to be slowing or in recession, or to curb deflation when it prices are falling too fast. The Fed will "make money loose" by lowering short-term interest rates (also known as the Fed funds, or discount rate), which decreases the cost of borrowing and effectively increases its attractiveness. 

The Federal Reserve: Controlling the Money Supply (The MOST IMPORTANT JOB OF THE FED) 3 Different Methods: 1) Change reserve requirements 2) Change the discount rate 3) Buy & Sell government bonds – open market operations (OMO)

Tightening the Money Supply Increase/Decrease reserve requirements? 2) Increase/Decrease the discount rate? 3) Buy/Sell government bonds – open market operations (OMO)?

Loosening the Money Supply Increase/Decrease reserve requirements? 2) Increase/Decrease the discount rate? 3) Buy/Sell government bonds – open market operations (OMO)?