Call to Order President Obama says that the government doesn’t have enough money to pay for all of the programs that he wants. Why doesn’t he just print more money?

Why don’t you just print more money? If you said “inflation” you are right! When there’s too much of something, it loses its value. What happens to the money in your pocket if the gov’t prints up $10,000,000,000 tomorrow? It would be worth a little bit less than it was before because now there’s more money around Maybe your dollar buys a candy bar today… … but only a pack of gum tomorrow

Why don’t you just print more money? But this can easily spiral out of control… especially if the government keeps printing more and more money. After World War I, Germany had to pay other countries a lot of money in exchange for starting the war. Their economy was a wreck, so they just printed up billions of dollars. These children are playing with stacks of bills that they turned into building blocks This woman is burning the money to heat her home because it’s cheaper than buying coal

Why don’t you just print more money? In the beginning, about 6000 Zimbabwean dollars (Z$) equaled $10 US The same sort of thing was going on in Zimbabwe not long ago… In a matter of a few years, inflation exploded because Zimbabwe’s government kept printing currency If a candy bar cost $1 in 2007, by mid 2008 it cost $230,000,000 $100 Billion bought 3 eggs.

Today’s Objective Students will be able to understand the influence of the Federal Reserve Bank on Monetary Policy by  Completing guided notes  Examining the effects of monetary policy on the money supply  Completing an job performance evaluation for Paycheck #3

Monetary Policy  Policies that affect the nation’s supply of money and credit

Goals of Monetary Policy Stable Prices Consistent Economic Growth Full Employment

The Federal Reserve (The Fed)  The central bank for the U.S. Gov’t  Purpose is to regulate money and ensure a stable economy The Fed Jobs of the Fed:  Prints money  Is the gov’t’s bank  Regulates other banks  Makes loans to banks  Controls the supply of money

Where’s Your Fed?

Open Market Operations  Buying and selling securities (loans to the gov’t) The Fed prints money and sells loans to banks Bank of America then loans out money to citizens or businesses Then they use it to buy stuff that they want

DefinitionSituation Effect on the Money Supply Open Market Operations: Buying and selling securities (loans to the gov’t) The Fed buys up securities _______________ the Money Supply The Fed sells securities _______________ the Money Supply Reserve Requirement: DECREASES the Money Supply INCREASES the Money Supply Discount Rate: ____________________ the Money Supply ____________________ the Money Supply DECREASES INCREASES

Reserve Requirement  The amount of money that the Fed requires banks must hold on to (reserve) High Reserve Requirement means that banks have less money to loan Low Reserve Requirement means that banks have more money to lend.

DefinitionSituation Effect on the Money Supply Open Market Operations: Buying and selling securities (loans to the gov’t) The Fed buys up securities INCREASES the Money Supply The Fed sells securities DECREASES the Money Supply Reserve Requirement: The amount of money that the Fed requires banks must hold on to (reserve) DECREASES the Money Supply INCREASES the Money Supply Discount Rate: The interest rate charged by the Fed to banks that borrow money ____________________ the Money Supply ____________________ the Money Supply The Fed increases the reserve requirement The Fed decreases the reserve requirement

Discount Rate  The interest rate charged by the Fed to banks that borrow money  “Interest” is the cost of borrowing money BorrowedInterest RateSean Owes $5010%$55 $5025%$62.50 $503%$51.50 BorrowedInterest RateSean Owes $5010%$55 BorrowedInterest RateSean Owes $5025%$62.50 BorrowedInterest RateSean Owes $503%$51.50 Imagine that Sean wants to borrow $50 from me to buy a uniform shirt and khakis.

DefinitionSituation Effect on the Money Supply Open Market Operations: Buying and selling securities (loans to the gov’t) The Fed buys up securities INCREASES the Money Supply The Fed sells securities DECREASES the Money Supply Reserve Requirement: The amount of money that the Fed requires banks must hold on to (reserve) The Fed increases the reserve requirement DECREASES the Money Supply The Fed decreases the reserve requirement INCREASES the Money Supply Discount Rate: The interest rate charged by the Fed to banks that borrow money ____________________ the Money Supply ____________________ the Money Supply The Fed raises the discount rate The Fed lowers the discount rate INCREASES DECREASES

Scenarios  Now, take a look at the following headlines and determine if the action will increase or decrease the money supply

# Headline Money Supply 1 “Today, the Fed lowered the discount rate from 4% to 2.5%”  Increase  Decrease 2 “The Fed announced it would sell Government Securities”  Increase  Decrease 3 “Fed raises Reserve Requirement from 3% to 3.5% for banks”  Increase  Decrease 4 “Ben Bernake, chairmen of the Fed, announces buying-back of government Securities”  Increase  Decrease 5 “Reserve Requirement lowered, banks begin to expand home loans”  Increase  Decrease 6 “Discount rate raised from 4% to 5% amid inflation fears”  Increase  Decrease

# Scenario Is this a Recession? What should the Fed do? 7 The economy is stagnant (inactive). The country is at peace. The unemployment rate is eight percent. The GDP is declining. There is a huge government deficit, and Americans are rebelling against tax increases. Next year is an election year for the President.  Yes  No  Increase the Discount Rate / Reserve Requirement  Decrease the Discount Rate / Reserve Requirement  Buy Gov’t Securities  Sell Gov’t Securities Why? 8 Inflation grips the United States. The Consumer Price Index has gone up fifteen percent in the past year. The Unemployment Rate is virtually nonexistent, with only three percent of the labor force looking for jobs. Factories are operating at full capacity.  Yes  No  Increase the Discount Rate / Reserve Requirement  Decrease the Discount Rate / Reserve Requirement  Buy Gov’t Securities  Sell Gov’t Securities Why? 9 The United States is experiencing a depression. One out of every three Americans is unemployed. The GDP has fallen by thirty- five percent over the past year. Factories are closing every day. The government deficit has declined over the past decade and is not a great problem.  Yes  No  Increase the Discount Rate / Reserve Requirement  Decrease the Discount Rate / Reserve Requirement  Buy Gov’t Securities  Sell Gov’t Securities Why?