Monetary Policy Control of money supply (M) and interest rates (i)

Panic of 1907 Fixed supply of loans “Runs” 1907

Federal Reserve Act of 1913 Created a central bank called: Federal Reserve system “The Fed”

Role of Fed Supervise member banks Hold Cash reserves Move money in and out of circulation Stabilizes the national monetary and banking systems

The Fed is divided into 12 district banks

Fed’s service to Banks Clearing Checks Loans to Banks

Services to Government 1. Serving as the government’s bank Gov’t funds Checking account Records deposits and withdrawals Advises the gov’t.

Services to Government 2. Supervising the Fed’s member banks Monitors: Regulates Banking:

Services to Government 3. Regulating the national money supply Amount of money circulating in the U.S. economy Buy and sell

Two types of Policies Expansionary Contractionary

Expansionary policy Designed to expand the money supply. During recession

Contractionary Policy Slows business activity and helps stabilize economy Too much Money: Too little Money: Fed Raises interest rates  contracts money supply

Components of Monetary Policy Open-Market Operations Discount Rate Reserve Requirement

Open-Market Operations Buying and selling of Government securities Contract-> Sells Expand -> Buys back

Discount Rate The interest rate the Fed charges member banks Lowering encourages banks to borrow Increasing Discourages borrowing

Reserve Requirement The money banks are required to have in their vaults or in their account at district Federal Reserve bank Fed can raise or lower this percentage, but rarely does