MONETARY POLICY AND

THE FEDERAL RESERVE(Write that 3 x!!!!!!!!!)

MONETARY POLICYIS A DELIBERATE ATTEMPT BY THE FED

TO REGULATE OR STABILIZE THE ECONOMYUSING THE TOOLS

OF THE FEDERAL RESERVE SYSTEM

Topic: (What are we taking about?)

Monetary policy

What is Monetary policy?

An attempt by the Fed to fix the economy

How can the Fed fix the economy?

By using the tools of Monetary Policy

What are its tools? RR, DR, OMO

To stop recession…open up the dam; giving people more water/money to use

FLOOD GATES OPEN

To fight inflation…shut off the supply ; giving people less water/money to

use

FLOOD GATES CLOSED

THE FEDERAL RESERVE’S TOOLSTO CONTROL MONETARY POLICY ARE:

RESERVE REQUIREMENT

DISCOUNT RATE

OPEN MARKET OPERATIONS

RESERVE REQUIREMENT

THIS IS THE AMOUNT OF EVERY DEPOSITTHAT REMAINS ON RESERVE

In other words; it stays in the bank; it remains “on hand.”It cannot be loaned out or borrowed.

The reserve requirement is controlled by the Fed. Only the Fed can raise it or lower it.

If the Fed raises the reserve requirement; more money stays in the bank.

If the Fed raises the reserve requirement; more money stays in the bank. If more money stays, within the confines of the bank, less is able to be

loaned!

If less money is loaned out; less money is circulating in the economy!

So, if the Fed wants less money circulated , it is because the economyis flooded with currency. There is too much in circulation…

THERE IS INFLATION!!!

(If there is inflation in the economy; the reserve requirement is raised!)

DISCOUNT RATEThe discount rate is the actual rate of

interest the Fed charges its member banks.

Member banks add on to the percent todetermine the rate of interest you will be charged.

The Fed raises or lowers the discount rate.The Fed either increases or decreases the amount

of interest it charges its member banks.

(a)If the Fed RAISES the discount rate; it makes it harder to get a loan;

(b)taking money out of the economy! (b) If the Fed LOWERS the discount rate; it makes it easier to get a loan, putting money into the economy.

If the Fed constricts the money supply (to tighten things up,) it puts money into or takes money out of

circulation? OUT!

IT CONSTRICTS THE FLOW OF THE MONEY SUPPLY.

What is happening in the economy for the Fed take this action?

INFLATION

OPEN MARKET OPERATIONSOpen Market Operations is a term used to refer to the buying or selling of securities (bonds) by the Fed on the Open Market (as

opposed to behind closed doors. )The Fed has the ability to buy or sell bonds to its member banks.

If it sells bonds to its member banks; The Fed gets …

MONEY!

The Fed then takes the money and puts it in a safe place. :O)

It has effectively taken money OUT of the economy.

This action constrict the money supply. It would make it harder to borrow money.

The Fed would take this action during….INFLATION

SUMMARY OF RR, DR, OMO

RESERVE REQUIREMENT CAN GO UP OR DOWN

DISCOUNT RATE CAN GO UP OR DOWN

OPEN MARKET OPERATIONS ARE BOUGHT OR SOLD

DURING INFLATION : RR G DR G OMO :SELL

UP, UP, SELL…UP, UP, SELL…UP, UP, SELL

WHEN??? DURING INFLATION!!!

Reserve RequirementReserve RequirementIt goes up and down It goes up and down

During inflation we* raise it a lotDuring recession it drops like a rock

The Discount Rate works exactly the same as…

(go back to top)To the tune of “Three Blind Mice”

* “We” refers to the Fed.

WHAT ACTION WOULD THE FED TAKE DURING A RECESSION?

Action of the Fed to stop inflation MORE $ $$$

in bank; less in circulationto control

spending!)

LESS in circulation

LESS in circulation

LESS in circulation

LESS in circulation

BANKS

Action of the Fed to fight recession

MO

RE IN

CIRC

ULAT

ION

MORE IN

CIRCULATI

ON MORE IN

CIRCULAT

ION M

ORE

IN

CIRC

ULAT

ION

LESS $ in the bank;more in circulationto encourage spending!

BANKS

Which is it?: Inflation or Recession

Is he putting money in or taking money out of the economy?

Does it indicate more or less money in the bank?

Which is being depicted: Inflation or Recession?

2. WHAT ARE THE THREE TOOLS OF THE FED?

3. WHAT ARE THE THREE TOOLS OF THE FED AND WHAT ACTION WOULD THE FED TAKE DURING INFLATION?

4. WHAT HAPPENS TO OMO DURING INFLATION?

5. WHAT SHOULD THE FED DO TO ITS DISCOUNT RATE DURING A RECESSION?

1. WHO CONTROLS MONETARY POLICY?

Chapter 11 + 12 : EZ Quiz

RR DR OMO

1

2

3

Copy the following chartin prep for the second quiz.Fill it in according to the actionsthe Fed would take during a recession or during an inflation in the followingsituations…..next slide.

1.The economy appears to be slowing down. Stock prices are depressed and the housing market is in a slump.

2. Prices are skyrocketing. Tulips have quadrupled in price. Speculation in the market is rampant. 3. Unemployment has risen to an all-time high. Banks are defaulting and the stock market has been negatively impacted.

Monetary Policy Quiz 2