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Economic Instability & the Federal Reserve.

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Presentation on theme: "Economic Instability & the Federal Reserve."— Presentation transcript:

1 Economic Instability & the Federal Reserve

2 A Bank Run

3 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

4 But WAIT… We’ve already talked about how economics is about survival of the fittest—”Creative Destruction” So why should we care if a bank fails?

5 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

6 Fed Geography

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

8 The Fed Today Twin targets: low unemployment and stable price levels
Most powerful central bank in the world Chairman of the Fed: Jerome Powell

9 Fiscal v. Monetary Fiscal Policy Monetary Policy
Controlled by the federal government (usually) and sometimes states Idea is to increase government spending or cut taxes to stimulate economy Controlled by the Federal Reserve Three tools of the Federal Reserve

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 Which Direction? Contractionary Expansionary
Means “shrinking the money supply” Used to rein in inflation Selling bonds, raising the discount rate, or increasing the reserve requirement Means “growing the money supply Used to reduce unemployment Buying bonds, lowering discount rate, decreasing reserve requirement

12 Quantity of Money (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


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