Monetary Policy and the fed Part two module 5 quiz revisited

Three tools of monetary policy Tool number one: Open market: buy or sell securities on the open market Increase money supply: buy securities Decrease money supply: sell securities

Three tools of monetary policy Tool number two ∆ discount rate: When the Fed lowers the discount rate, banks are encouraged to make more loans and the money supply increases. Discount rate money supply

Tool number two ∆ discount rate: When the Fed raises the discount rate, banks are discouraged from making loans and the money supply decreases. Discount rate money supply

Three tools of monetary policy Tool number three ∆ reserve requirement When the Fed lowers the reserve requirement, banks have more money to lend and the money supply increases. Reserve requirement: Money Supply:

From tools to objectives: Three objectives of the monetary policy of the federal reserve: Economic growth Price stability Full employment

What is inflation? A general increase in overall prices in an economy in a given period of time Too much money chasing too few goods and services

High unemployment and low gdp What to do? Oh, dear! What to do? Increase money supply by Buying securities—puts more money back in circulation Lowering the discount rate—encourages banks to make more loans (creating money) Lowering reserve requirements for banks—banks can loan more of the deposits out

High inflation? What to do? Oh, dear! What to do? Sell securities—takes money out of circulation Raise discount rate—discourages banks from making loans Raise reserve requirements—banks have less money to lend

Money, money money. Money!!!!! Anything that is generally accepted as final payment for goods and services Three purposes: Medium of exchange: Buy things Unit of account: $10 worth of items=$10 worth of items Store of value: save for future purchases

Fractional reserve banking Banks hold back a fraction of the deposits on account and lend the rest of the deposits out.