Money and the Economy Target: I can explain the role the Federal Reserve plays in the economy.

The Role of Banks Banks are a business out to make a profit

The Role of Banks Banks are a business out to make a profit This is why the government must regulate them

The Role of Banks Banks are a business out to make a profit This is why the government must regulate them Banks would act in a pro-cyclical manner if left unchecked

The Role of Banks Banks are a business out to make a profit This is why the government must regulate them Banks would act in a pro-cyclical manner if left unchecked When the economy is doing good they would continue to increase the prosperity by offering even more loans

The Role of Banks Banks are a business out to make a profit This is why the government must regulate them Banks would act in a pro-cyclical manner if left unchecked When the economy is doing good they would continue to increase the prosperity by offering even more loans This is bad b/c it would cause inflation and collapse the economy

Banks would act in a pro-cyclical manner if left unchecked On the other hand, in bad times, banks would reduce the # of loans

Banks would act in a pro-cyclical manner if left unchecked On the other hand, in bad times, banks would reduce the # of loans The means that we may not get out of a recession

Banks would act in a pro-cyclical manner if left unchecked On the other hand, in bad times, banks would reduce the # of loans The means that we may not get out of a recession All of this means that the government must act in a counter cyclical manner!

Banks Expand Money A bank has a reserve requirement

Banks Expand Money A bank has a reserve requirement Generally this requirement is 10%, meaning they must have 10% of the assets that they loan out

Banks Expand Money A bank has a reserve requirement Generally this requirement is 10%, meaning they must have 10% of the assets that they loan out Ex. – IF they loan a $1000, they must keep $100 on hand

Banks Expand Money A bank has a reserve requirement Generally this requirement is 10%, meaning they must have 10% of the assets that they loan out Ex. – IF they loan a $1000, they must keep $100 on hand They can do this b/c the loaned $ will be spent, and the seller will place the $ back into a bank

FDIC After people lost their $ in bank accounts during the Depression, the gov’t began to insure accounts

FDIC After people lost their $ in bank accounts during the Depression, the gov’t began to insure accounts The Federal Deposit Insurance Corporation will insure each deposit up to $250,000

The Federal Reserve The Fed oversees banking within the country

The Federal Reserve The Fed oversees banking within the country Their most important job is to maintain a stable supply of $

3 Ways to maintain stable supply 1) Reserve Requirement – the fed can change the amount of $ banks must keep on reserve, thus changing the amount of $ in circulation

3 Ways to maintain stable supply 2) Discount Rate – the Fed loans money to banks, it can change the interest rate charged to the banks, thus changing the amount of $ in circulation

3 Ways to maintain stable supply 3) Open Market Operations – change the amount of securities that they buy/sell

3 Ways to maintain stable supply 3) Open Market Operations – change the amount of securities that they buy/sell Ex. – if they sell securities, they are taking $ out of the system

3 Ways to maintain stable supply 3) Open Market Operations – change the amount of securities that they buy/sell Ex. – if they sell securities, they are taking $ out of the system Ex. – if they buy securities, they are increasing the amount of $ in the system

3 Ways to maintain stable supply 3) Open Market Operations – change the amount of securities that they buy/sell Ex. – if they sell securities, they are taking $ out of the system Ex. – if they buy securities, they are increasing the amount of $ in the system It is open to debate on the effect the Fed has had on the economy