Monetary Policy review huh???? can you break it downnnnn??? MMMMonetary policy – things the Federal Reserve does to regulate the economy & influence.

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Presentation transcript:

Monetary Policy review

huh???? can you break it downnnnn??? MMMMonetary policy – things the Federal Reserve does to regulate the economy & influence the rate of inflation by increasing or decreasing the money supply tttthe actions will depend upon where in the business cycle the economy is…..

 A period of contraction (recession) - means that the economy has slowed way down – unemployment is high, people aren’t spending or borrowing money, the economy is not growing

What will the Fed want to do? wwwwhen the economy is in a recession (contraction) the Fed will want to increase the money supply to get the economy moving & growing again

How do they do thattttt???????? Easy Money policy!! 1. decrease the discount (interest) rate  this encourages people to take out loans which increases the amount of money in circulation!

2. Reduce the reserve requirements  when banks have to keep less money in reserves, they can lend more money out …which increases the amount of money in circulation!

3. “Open market operations” – buy government bonds  the Fed buys the bonds using Federal Reserve funds …….. which increases the amount of money in circulation!

Oh…..I get it!!! ……..but what about….. AAAA period of expansion - means that the economy has been steadily growing - interest rates are high, unemployment is low - inflation – prices increasing

…so…what will the Fed do nowwww?? wwwwhen the economy is in an expansion, the Fed will want to decrease the money supply to slow the economy down and reduce inflation

…..how…..??????Tight Money policy!! 1. Increase the discount (interest) rate  this will discourage people from taking out loans, which will decrease the amount of money in circulation

2. Increase the reserve requirements  banks will have to keep more money in reserves, and will have less money to lend out ….which will decrease the amount of money in circulation

3. “Open market operations – sell government bonds  the money received for the bonds is taken out of the market ….which decreases the amount of money in circulation!