How does the FED stabilize economies?
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Transcript of How does the FED stabilize economies?
HOW DOES THE FED USE MONEY TO STABILIZE
ECONOMIES?
Monetary Policy Money, Measures, Time Value, Creation
What is SCRILLA? (Money)
Medium of Exchange Can trade with it
Unit of Account (Value) Shows worth
Store of Value Maintains value
3 types of $ are included in the Money Supply, the FED Controls M1 and M2
MONEY SUPPLY
Types of Cash Stacks: M1
M1
Currencies and Coins
Demand Deposits Traveler’s Checks and
Checking Accounts
TYPES OF CASH STACKS: M2
M2STORE OF VALUE
Less Liquid…
(slower to convert to
cash)
M1 + Savings Deposits Time deposits Money Market Deposits Mutual Funds
TYPES OF CASH STACKS: m3
M3The least liquid
M2 +…
Large Time Deposits (over $100,000)
TIME VALUE OF MONEY
Value falls with INFLATION Interest Rates equate dollars
today with dollars in the FUTURE
HOW DOES THE FED USE THE MONEY SUPPLY TO
PREDICT GDP?
MV = PQ
PQ = Nominal GDP
M = Money Supply (M1 or M2)
V = Money’s Velocity (# of times Dollars is Spent)
P = PL (AS/AD) Q = Real GDP
MONETARY EQUATION OF EXCHANGE
The Money Market
R = Nominal Interest Rate
R
R
QM
MS
MD
Q
CREATE THE NEW CURRENCY DESIGN FOR A DEVELOPING COUNTRY THAT INCLUDES:Component Description Points
Possible
Currency Basic Details
Includes Country Chosen, Currency, Current President, and Exchange Rate Against the Dollar
5
Functions of Money
Includes the 3 functions of Money on the Front
9
Quantity Theory of Money
Includes the Equation and what each letter represents
6
Types of Money Includes the 3 types of Money and a Brief Description of Each
9
The Money Market Graph
Includes the Money Market Graph with a conclusion of how the FED might influence it
11
Overall Quality Neat, well-designed, colored and includes the basic shape of a currency.(Can receive extra points for creativity or the graph that determines a currency’s value)
10
HOW CAN THE FED USE THE MONEY SUPPLY TO ACHIEVE FULL
EMPLOYMENT AND PRICE STABILITY?
THE FED: Central Bank
Tools Of Monetary Policy
% of $ that must be stored
Determines the multiplier (1/required
reserves) Usually 10% or .1
Interest banks pay the Fed for loans Decrease = banks
borrow more Increase = banks
borrow less
Reserve Ratio = RR Discount Rate
Tools of Monetary Policy
Interest Rate banks pay each other for loans
Buy Bonds: “Bigger Bucks”
Increase MS Sell Bonds:
“Smaller Bucks” Decrease MS
Federal Funds RateOpen Market Operations:
Treasury Bonds **
** = most frequently used Tool
Types of Monetary Policy
Expansionary
“Easy Money”
Contractionary
“Tight Money”
Increase MS ($$)
R
R
QM
MS
MD
Q
R1
MS1
Q1
Expansionary Monetary Policy
DECREASE MS (-$$)
R
R
QM
MS
MD
Q
R1
MS1
Q1
Contractionary Monetary Policy
Expansionary
1. Fed buys bonds, lowers Federal Funds, Reserve Requirements, Discount Rate “Bigger” Bucks
2. Increase MS
3. R↓
4. IG↑
5. ↑ AD
R
R
QM
MS
MD
Q
i1
MS1
Q1
R
IG
ID
I I1
R
i1
GDPR
PL
AD
SRAS
LRAS
YF
P
Y
AD1
P1
EXPANSIONARY
Contractionary
1. Fed sells bonds, raises Federal Funds, Reserve Requirements, and Discount Rate “Smaller” Bucks
2. Decrease MS
3. R ↑
4. IG ↓
5. ↓ AD
Currency: BACKComponent Description Points
Possible
Country’s Major Land Mark/ Resource
Includes Image of Major Landmark or Resource within the Country’s Currency
5
Tools of Monetary Policy
Includes the 4 tools of Monetary Policy on the Back with a description of each
9
Types of Monetary Policy
Includes the Definition of Expansionary and Contractionary Monetary Policy
6
3 Graphs of effects of Expansionary Policy
Includes the domino effects of how MP eventually affects Aggregate Demand
10
Extra Decorations
Includes images within the currency that demonstrate the religious and/or cultural traditions within the country
10
Overall Quality Neat, well-designed, colored and includes the basic shape of a currency.
10
Total 105