1. Macroeconomics The study of behavior and decision making of entire economies

2. The goal of any stabilization policy is to smooth out fluctuations in the business cycle

3. Business cycle - A period of macroeconomic expansion followed by a period of contraction

4. MONETARY POLICY AND THE FEDERAL RESERVE

5. The Federal Reserve System is the nation’s central bank

6. The Department of Treasury is responsible for manufacturing (printing) money

7. The Federal Reserve (aka The FED) controls the MONEY SUPPLY

8. The Federal Reserve is responsible for putting and taking dollars dollars into or out of circulation

9. STRUCTURE OF THE FEDERAL RESERVE

10. Board of Governors - The seven- member board that oversees the Federal Reserve System

11. Appointed by President Confirmed by the Senate I APPOINT THE BOARD OF GOVERNORS

12. 1 Board of Governors = Federal 12 District Banks = Regional 10,000 National Banks = Local

13. Monetary policy Influencing the economy by controlling the nation’s money supply

14. What are goals of fiscal policy? The same as macroeconomic goals…remember them? 1.Economic growth 2.Full employment 3.Low inflation

15. Monetarism Belief that the money supply is the most important factor in macroeconomic performance

16. The cost of borrowing money is the interest rate

17. Monetary policy alters the supply of money

18. The supply of money affects interest rates

19. Interest rates affect the level of investment and spending in the economy

20. The money supply affects interest rates Too much money rates are low…Too little and rates are high Remember supply and demand?

21. HIGH $ SUPPLY = LOW INTEREST RATES

22. People and Businesses  borrow more money  …because money is cheap!!!!

23. People may buy a new house or car Businesses may expand

24. Creates jobs Encourages consumer spending Helps the economy grow C + I + G + (X-M)

25. The FED can influence the economy by controlling the nation’s money supply MONETARY POLICY

26. Influence the economy

27. Is the problem unemployment, or is the problem inflation???

28. Expand?Contract?

29. Easy Money Policy Purpose is to Speed up the economy Used in periods of contraction and recession

30. Easy money policy Monetary policy that increases the money supply

31. The Fed may follow an easy money policy when the macroeconomy is experiencing a contraction

32. SMALL $ SUPPLY = HIGH INTEREST RATES, PEOPLE & BUSINESSES BORROW LESS

33. Tight Money Policy purpose is to slow the economy Used in period of expansion and inflation

34. Tight money policy Monetary policy that reduces the money supply

35. The Fed may follow a tight money policy when the macroeconomy is experiencing TOO rapid rate of growth

36. Three tools the Fed uses to adjust the money supply

37. 1.Reserve requirement

38. 2. Discount rate

39. 3. Open market operations

40. Increase the money supply: ++++++++++++ 1.Decrease the Required Reserve Ratio (RRR) 2.Decrease the Discount Rate 3.Buy Back Federal Securities on the Open Market

41. Decrease the money supply: ------------- 1.Increase the Required Reserve Ratio – RRR 2.Increase the Discount Rate 3.Sell federal Securities on the Open Market

43. Reserve requirements

44. Reserve Requirement Banks must keep a certain percentage of their deposits on “reserve” That money cannot be loaned out “Required reserve”

45. Reserve requirement Formula used to compute the amount of reserves an institution must have Set by the Fed To ensure that banks have enough funds to meet customers’ withdrawal needs

46. Legal reserves Coins, currency, and deposits used to fulfill the Fed’s reserve requirement Vault cash

47. Excess reserves Bank money available for loans Lending ability depends on excess reserves

48. The more money in excess reserves… …the more banks can loan out.

49. If the Fed lowers the rewerve requirement…banks have more excess reserves and can loan more out.

50. When a bank loans more out…

51. …the money supply increases.

52. MONEY SUPPLY RESERVE REQUIREMENT

53. HIGH $ SUPPLY = LOW INTEREST RATES

54. People Businesses Borrow more money Money is cheap

55. People may buy a new house or car Businesses may expand

56. Creates jobs Encourages consumer spending Helps the economy to grow C+I+G+(X-M)

57. Easy Money Policy SPEED UP THE ECONOMY!!!! Unemployment!!!

58. If the Fed increases the reserve requirement…

59. …banks have less excess reserves and can loan less out.

60. When a bank loans less out…

61. …the money supply decreases.

62. RESERVE REQUIREMENT MONEY SUPPLY

63. SMALL $ SUPPLY = HIGH INTEREST RATES

64. Tight Money Policy SLOW DOWN THE ECONOMY !!!! INFLATION

65. Tight Money Policy = SLOW DOWN THE ECONOMY !!!!

66. Changing the reserve requirement is Simplest way to adjust money supply BUT ………………….

67. The Fed rarely changes the reserve requirement It can be disruptive to the whole banking system

68. Reserve requirements,the discount rate,and open market operations 3 TOOLS

69. The discount rate

70. The interest rate that the Fed charges on loans to banks

71. Discount Rate If the Fed lowers the discount rate…

72. …it will cost less for banks to borrow money.

73. Therefore, banks are more willing to borrow money from the Fed.

74. Discount Rate Banks can loan out more of their EXCESS RESERVES.

75. When banks loan more out, the money supply goes up.

76. MONEY SUPPLY DISCOUNT RATE

78. Easy Money Policy

79. Discount Rate If the Fed raises the discount rate…

80. …it will cost more for banks to borrow money.

81. Therefore, banks are less willing to borrow money from the Fed.

82. Discount Rate Since banks must meet the RESERVE REQUIREMENT, they will loan less out to customers

83. When banks loan less out, the money supply goes down

84. DISCOUNT RATE MONEY SUPPLY

85. Tight Money Policy

86. Reserve requirements,the discount rate, and open market operations 3 TOOLS

87. Open market operations

88. Refers to the buying and selling of government securities by the Fed

89. Open market operations It is the monetary policy tool used most often by the Fed

90. The Federal Open Market Committee (FOMC) Looks at the state of the economy Decides what to do with the money supply

91. Federal Advisory Council (FAC) The research arm of the FED = number crunchers GDP CPI UNEMPLO. Etc…

93. Government securities Savings bonds Treasury bonds Treasury notes Treasury bills

94. If the Fed PURCHASES securities, it is giving people money…

95. Which goes into circulation, increasing the money supply.

96. What effect does the Fed’s purchase of government bonds have on the money supply? It increases the money supply

97. MONEY SUPPLY BUYS GOVERNMENT SECURITIES

98. Easy Money Policy

99. If the Fed SELLS securities, it is taking money from people…

100. Which take money out of circulation, decreasing the money supply.

101. How does the Fed’s sale of bonds reduce the money supply? When people buy bonds, their money is going out of circulation

102. MONEY SUPPLY SELLS GOVERNMENT SECURITIES