1. Monetary Policy

2. The U.S. Federal Reserve System
The U.S. Federal Reserve System has three main responsibilities
To regulate and supervise banks
To operate the nations payment systems
To establish and implement monetary policy

3. This lesson focuses on monetary policy:
The goals of Monetary Policy are:
To maintain economic growth
To keep prices stable- trying to avoid inflation or deflation
To keep unemployment low

4. Common Economic Indicators
Economic indicators are used to determine if the monetary policy needs adjusting. These are some of the indicators the Federal Reserve uses: Output- this economic indicator serves as a gauge of the economy’s ability to provide products and services to people

5. Common Economic Indicators
Interest rates- these variables determine consumers’ and businesses’ cost of borrowing credit and therefore affect their spending Trade Balance- This indicator is the difference between the amount of goods and services exported and the amount imported.

6. Common Economic Indicators
Inflation- ( Monetary policy tries to prevent severe fluctuations) Unemployment- (Monetary policy tries to keep this number low.

7. Key Tools of Monetary Policy
Discount Rate
The interest rate charged by the Federal Reserve to banks that borrow on a short- term (usually overnight) basis
Reserve Requirements
The amount of money banks must keep on reserve at the Fed
Open Market Operations
Buying and selling Treasury securities between the Fed and selected financial institutions in the open market
Most important tool

8. Tight Monetary Policy- restrains inflation
Feds take money out the economy by selling securities
This creates a rise in the federal funds rate
Banks then have less money to spend

9. Tight Monetary Policy- restrains inflation
Consumers and businesses may borrow less
Consumers and businesses spending may decrease
Inflation goes down.
Unemployment goes up

10. LOOSE OR EASY MONETARY POLICY- fights recession
The Fed buys securities which add money to the economy.
This decreases the federal funds rate
Short-term interest rates go down

11. LOOSE OR EASY MONETARY POLICY- fights recession
Consumers and businesses may borrow more money
Consumers and businesses’ spending may increase
Inflation may go up
Unemployment may go down

12. Impact on international trade
When the Federal Reserve adjusts interest rate it also impacts international trade:
A higher interest rates result in a stronger currency, benefitting importers.
A lower interest rate results in a weaker currency, benefitting exporters.