1. Central Bank and Control of Money Supply
Ali Brosky, Melissa Johns, Sarah Tuckowski, and Victoria Wojton
AP Econ - 5th Period

2. Central Bank and Money Supply: Overview
Banks can create money, but there is also a need to control the money created, or the money supply. How is controlling the money supply achieved?
-a central bank exists to control the money supply of a nation.
-in the United States, the Federal Reserve serves as the central bank.

3. Central Bank and Money Supply: Overview
Three objectives for the Federal Reserve. These objectives include:
1) Conduct monetary policy: usage of expansionary and contractionary policies to control inflation rates (increase/decrease supply of money)
2) Supervise and regulate financial firms: oversee all banks operating in the United States.
3) Provide financial services: able to give money to other banks.

4. Quantity Theory of Money: Overview
There is a direct relationship between the amount of money in an economy and the price of goods and services sold.
If the quantity of money in an economy doubles, price levels will also double.

5. Quantity Theory of Money: Fisher Equation
MV = PT
M = Money Supply
V = Velocity of Circulation
P = Average Price Level
T = Volume of Transactions of Goods and Services

6. Interest Rates Keynesians: interest rates are affected by gov spending
in order to fight inflation, decreasing the money supply will drive up interest rates and reduce consumption and investment
Monetarists:
natural rate of real interest - states that fluctuations in the nominal interest rate reflects changes in inflation
only real interest rates must change to influence investments

7. Tools of Central Bank Policy
The required reserve ratio (RRR)
The discount rate
Open-market operations

8. The Required Reserve Ratio (RRR)
A specific percentage of checking account deposits that banks must keep in liquid, zero-interest reserves
This amount is set by the Fed
Money Multiplier = 1/RRR
an increase of the RRR leads to a decrease in the money supply and vice versa

9. The Discount Rate
Interest rate that the Fed charges to banks for borrowing money
If the discount rate is increased, the cost of borrowing increases for banks and they will not borrow as much
Banks will not make as many loans and money supply will decrease

10. Open-Market Operations
The Fed's most powerful tool for adjusting bank reserves
Buying and selling of government securities (bonds) in the open market
When the Fed sells securities, money is given to the Fed in exchange
Bank reserves decrease
Money supply decreases
When the Fed buys securities, it pays money out
Deposits and bank reserves increase
Money supply increases