Chapter 9.2 Monetary Policy Monetary Policy – 2 nd option the federal government has to influence the economy. This is key!! – All monetary policy is controlled by the Federal Reserve system. Aka “The Fed Reserve”

The Fed Reserve What is the Fed Reserve? – The central banking system in the United States. – What does it do? It controls how much money is in circulation. – How? Loans money to the banks in America.

How the Fed Reserve works Fed Reserve has a Board of Governors – 7 members vote on what interest rates to put on loans to banks in America. – Leader is Ben Bernanke. Fed Reserve Chairman

Fed Reserve Districts The Fed Reserve has district banks – These district banks oversee all banks in their area.

Making Monetary Policy Fed Reserve has 3 tools to implement monetary policy: 1.Reserve requirements 2.The discount rate 3.Open market operations

Reserve Requirements The Fed Reserve sets the requirements (rules) for banks in the U.S. – Most important rule: Determining the minimum amount of money that a bank must keep on hand at all times! – Keeps you from not getting your money. – What happens if everyone wants their money at the same time? FDIC (Federal Deposit Insurance Corporation) – Guarantees your money up to $250,000

Discount Rate Discount rate – The interest rate that the Fed Reserve charges banks to get money. – Why does the Fed Reserve charge interest to banks? Keep them from asking for lots of money. – Banks won’t want to take as much if they have to pay large interest on it. » Example: If a bank wants $15 million to loan out, the Fed will charge them 10% interest. » This forces banks to charge higher interest rates for loans to the consumer. » Who is going to take a loan with higher interest rates?

Open Market Operations – Purchase or sale of bonds in order to finance the operations of government. – Bonds Certificates issued by government to a lender from whom it has borrowed money. – How does it work? Pay $500 now Wait 10 Years Get $1000 back!

Negatives to monetary policy It takes a long time to take effect! Bonds must be sold! – Can be done quickly!!! Unless people are skeptical and decide to save their money. – Loans take time to be passed out. Too long! Need money now!