MONETARY POLICY IS A DELIBERATE ATTEMPT BY THE FED TO REGULATE OR STABILIZE THE ECONOMY USING THE TOOLS OF THE FEDERAL RESERVE SYSTEM

FLOOD GATES OPEN

FLOOD GATES CLOSED

THE FEDERAL RESERVE’S TOOLS TO CONTROL MONETARY POLICY ARE: RESERVE REQUIREMENT DISCOUNT RATE OPEN MARKET OPERATIONS

(If there is inflation in the economy; the reserve requirement is raised!)

(a)If the Fed RAISES the discount rate; it makes it harder to get a loan; (b)taking money out of the economy! (b) If the Fed LOWERS the discount rate; it makes it easier to get a loan, putting money into the economy. If the Fed constricts the money supply (to tighten things up,) it puts money into or takes money out of circulation? OUT! IT CONSTRICTS THE FLOW OF THE MONEY SUPPLY. What is happening in the economy for the Fed take this action? INFLATION

OPEN MARKET OPERATIONS Open Market Operations is a term used to refer to the buying or selling of securities (bonds) by the Fed on the Open Market (as opposed to behind closed doors. ) The Fed has the ability to buy or sell bonds to its member banks. If it sells bonds to its member banks; The Fed gets … MONEY! The Fed then takes the money and puts it in a safe place. :O) It has effectively taken money OUT of the economy. This action constrict the money supply. It would make it harder to borrow money. The Fed would take this action during…. INFLATION

SUMMARY OF RR, DR, OMO RESERVE REQUIREMENT CAN GO UP OR DOWN DISCOUNT RATE CAN GO UP OR DOWN OPEN MARKET OPERATIONS ARE BOUGHT OR SOLD DURING INFLATION : RR DDR  OMO :SELL UP, UP, SELL…UP, UP, SELL…UP, UP, SELL WHEN???DURING INFLATION!!!

Reserve Requirement It goes up and down During inflation we* raise it a lot During recession it drops like a rock The Discount Rate works exactly the same as… (go back to top) To the tune of “Three Blind Mice” * “We” refers to the Fed. WHAT ACTION WOULD THE FED TAKE DURING A RECESSION?

MORE $ $$$ in bank; less in circulation to control spending!) LESS in circulation BANKS

Action of the Fed to fight recession MORE IN CIRCULATION LESS $ in the bank; more in circulation to encourage spending! BANKS

Which is it?: Inflation or Recession Is he putting money in or taking money out of the economy? Does it indicate more or less money in the bank? Which is being depicted: Inflation or Recession?

Chapter : EZ Quiz

Copy the following chart in prep for the second quiz. Fill it in according to the actions the Fed would take during a recession or during an inflation in the following situations…..next slide.

1.The economy appears to be slowing down. Stock prices are depressed and the housing market is in a slump. 2. Prices are skyrocketing. Tulips have quadrupled in price. Speculation in the market is rampant. 3. Unemployment has risen to an all-time high. Banks are defaulting and the stock market has been negatively impacted.