1. Monetary Policy Using the amount of money and credit available to consumers to ……. influence the economy

2. The Federal Reserve System The Federal Reserve Bank (The Fed) is central bank of the U.S. designed to ……. oversee the banking system and regulate the quantity……. of money in the economy

3. Who controls monetary policy?

4. The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act:U.S. Congress 1.Maximum employment 2. stable prices (control inflation) 3.Stabilize interest rates Role has expanded to include: Regulate the banking and financial systems

5. Federal Reserve and Monetary Policy 1.Amount of money in economy determines amount of spending Too much money = inflation Not enough money = recession

6. Fed manages money supply by….. Influence lending among banks and other financial institutions

7. Monetary Policy Expansionary Monetary Policy= expand credit = (Easy money/loose money) lower interest rates means it is….. cheaper to borrow money ….. …..which leads to Economic …… Growth

8. Contractionary Monetary Policy = restrict credit (tight money) higher interest rates means it is…… more expensive to borrow money……. ………which leads to Economic ….. contraction

9. Three Tools of the Federal Reserve a)Reserve Requirement b)Discount Rate c.)Open Market Operations (Federal Funds Rate)

10. Reserve Requirement the FED requires banks to hold a certain…. amount of money from circulation The bank may not ….. – loan this money to any customers. Currently about 10%

11. Expansionary Monetary Policy Using Reserve Requirement If the Fed decreased the Reserve Requirement, then banks would be allowed to…… Loan out more money. The Money supply would…. Increase. Consumers would …. Borrow more and spend more and the economy would……. Expand (grow)

12. Consumers would …. Borrow more and spend more and the economy would……. Expand (grow)

13. Contractionary Monetary Policy Using Reserve Requirement Do on your own

14. Discount Rate (interest rates banks are charged) when the banks borrow directly from …. The FED

15. Expansionary Monetary Policy Using the Discount Rate If the Fed lowers DR, it is cheaper for….. banks to borrow money. So banks will pass on savings to customers by…. Lowering their interest rates And the money supply will…. Increase

16. and there is more…… Borrowing and spending and the economy will….. Expand (grow)

17. Contractionary Monetary Policy Using the Discount Rate Do on your own

18. Open Market Operations controlled by the Federal Open Market Committee (FOMC) -Most used tool of the Fed a)Fed buys and sells US government securities and US Bonds (define bond – The government needs money so they “Borrow “ the money from the public You buy a $1000 bond from the govt. with 10% interest. The govt agrees to pay you back the $1000 plus $100 from interest

19. Expansionary Policy = The Fed will buy bonds -Fed buys $1000 bond from Joe. So the money supply ….. -Inceased. -Joe gave up his bond but now has $1000 in cash So there will be more …. Spending And the economy will ….. Expand

20. Contractionary = The Fed will sell bonds -Fed sells $1000 bond to Joe. So the money supply…… -Decreased. -Joe now has a bond but $1000 less in cash -So there will be less….. -Spending -And the economy will…… -Contract

21. Fed’s effect on INTEREST RATES Intro to Money Market Graphs a)Expansionary ; buy bonds ; increase MS ; decrease IR Int Rate Q of Money MS 1MS 2 MD

22. b) Contractionary ; sell bonds ; decrease MS ; increase IR MS 2 MS 1 MD

23. When the Fed uses OMO to buy / sell bonds, it is manipulating the Federal Funds Rate (What is it?) Federal Funds – reserve balances of financial institutions held at 12 Regional Fed Banks If a bank can not meet its “reserve requirement” – it can borrow reserve funds from other banks a)FFR – the interest rate banks pay when they borrow from each other

24. FOMC sets “TARGET” rate for FFR -Uses OMO to adjust MS to adjust FFR “at or near target” a)How does this affect you, me, and the rest of the economy? Use of OMO and FFR……. “sets off a chain of events…..”

25. a)Expansionary Monetary Policy (using OMO and the FFR) i.FOMC buys securities and the MS will ….. ii.Increase iii.This will decrease FFR which means banks will …. iv.Pay less to borrow and therefore will….. v.Pass on savings to customers and lower their …. vi.Interest rates and the money supply will …. vii.Increase. Customers will borrow…… viii.More and spend……. ix.More and the economy will….. x.Expand (grow)

26. Contractionary