1. Economic Instability
& the Federal Reserve

2. A Video
Click Here

3. The Fed Short for “The Federal Reserve”
Created in 1913 by an Act of Congress
Two goals:
Prevent panic withdrawals
Make cross-country payments (especially checks) easier and more efficient
Centralized in Washington, DC

4. Banking History Banks failed a lot
People panicked and pulled their money out
If the bank had enough money to pay off their deposits, it was okay
If not, the bank paid back what it could, and closed its doors when it ran out of money
This is a bank failure

5. GDP Per Capita

6. Good Economics Generally speaking, good economies have:
Positive GDP Growth
Low unemployment
Relatively low inflation (~2%)
Increasing GDP per capita
Stable economic institutions

7. Fed Geography

8. MATH!!! (M) * (V) = (P) * (Y) where: M = Amount of Money in Supply
V = Velocity (how fast is the money being spent)
P = Price Level
Y = Real GDP

9. Fed Targets
Using this formula, the Fed can use the tools available to them to try to make the economy better
In general, it is assumed that an economy needs to have more money to keep it working
Think of it as “greasing the gears” of the economy
When the Fed gets more money into the economy, it (theoretically) grows the economy
This makes everything better (hopefully)

10. Three Tools of the Fed Open Market Operations Discount Rate
This is the process of buying and selling US Government Debt (government bonds) on the open market
Discount Rate
This is the interest rate that banks are charged when borrowing from the Federal Reserve
Reserve Requirement
This is the percentage of its liabilities (deposits) that a bank must hold on to and cannot loan out.

11. More Tools
All of these tools have the power to increase (or decrease) the money supply
Countercyclical monetary policy
In theory, this should make the economy more stable, which is good

12. Criticism

13. Fiscal v. Monetary Fiscal Policy Monetary Policy
Controlled by the federal government (usually) and sometimes states
Idea is to increase government spending, cut taxes, etc., to stimulate economy
Controlled by the Federal Reserve
Focus is on making money “loose”
Three tools of the Federal Reserve