Economics 2/23/10 http://mrmilewski.com

1. Economics 2/23/10 http://mrmilewski.com • OBJECTIVE: Examine the role of Banks. • I. Administrative Stuff -Attendance • II. Film: Modern Marvels Banks -questions on film about Banks

2. The Weeks Ahead • Chapter#15 Test Monday February 28th • ACT Tuesday March 1st • Work Keys Wednesday March 2nd • MME Thursday March 3rd • Chapter#17&18 Test Monday March 7th • Finals 1,2,3 Wednesday March 9th • Finals 4&5 Thursday March 10th • No School Friday March 11th • Third Trimester Starts Monday March 14th

3. Economics 2/24/11 http://mrmilewski.com • OBJECTIVE: Examine the Role of the Federal Reserve. • I. Journal #36 pt.A -Read “Business Week Newsclip” p.425 -Answer questions (1-2) p.425 • II. Return of Ch#13&14 Test • III. Quiz#21 • IV. Journal#36 pt.B -notes on Open Market Operations

4. The Weeks Ahead • ACT Tuesday March 1st • Work Keys Wednesday March 2nd • MME Thursday March 3rd • Finals 1,2,3 Wednesday March 9th • Finals 4&5 Thursday March 10th • No School Friday March 11th • Third Trimester Starts Monday March 14th

5. Weather 2/24/11

6. Figure 15.6 Easy v. Tight Money

7. Open Market Operations • Open market operations–the buying and selling of government securities in financial markets • Open market operations are one of the methods the Federal Reserve can use to influence short-term interest rates • Open market operations involve the purchase or sale of government securities by the Federal Reserve

8. Government Securities • When the Fed purchases gov’t securities, it increases the supply of money, putting downward pressure on interest rates (EASY MONEY) • When the Fed sells gov’t securities, it decreases the supply of money, putting upward pressure on interest rates (TIGHT MONEY) • Open market operations affect the amount of excess reserves in banks to support new loans

9. FOMC • The Federal Open Market Committee (FOMC) conducts open-market operations • The FOMC decides interest rates and monetary growth • As a central bank, the Fed makes loans to other depository institutions • discountrate–the interest the Fed charges on loans to financial institutions • If the discount rate goes up, fewer banks will want to borrow from the Fed, reducing the amount of money these banks have available to loan to their customers and forcing interest rates up & vice versa http://www.ibtimes.com/data/articleimgs/216006-federal-reserve-boards-federal-open-market-committee.jpg

10. Moral Suasion • Moral suasion - the use of persuasion such as announcements, press releases, articles in newspapers and magazines, and testimony before congress to control the money supply • selective credit controls - credit rules pertaining to loans for specific commodities or purposes

11. Short-Run Monetary Policy • In the short run, an increase or a decrease in the money supply affects the interest rate, which is the price of credit • When the Fed expands the money supply, the cost of credit goes down. When the Fed contracts the money supply, the cost of credit goes up

12. Short Run Contraction • Although the Fed tries to do what it thinks is best for the economy, people do not always agree with its decisions • In 1981, for example, the Fed was criticized for allowing interest rates to get too high

13. Monetizing the Debt • To keep the rates from going up too high, the Fed decided to monetize the debt– create enough extra money to offset the deficit spending in order to keep interest rates from changing • The process of monetizing the debt is illustrated where DD and SS represent the initial demand and supply of money

14. Economics 2/25/11 http://mrmilewski.com • OBJECTIVE: Examine the Secret History of the Credit Card. • I. Administrative Stuff -Attendance • II. Quiz#22 • II. Frontline: The Secret History of the Credit Card -questions on film about credit cards

15. Economics 2/25/11 http://mrmilewski.com • OBJECTIVE: Examine the Federal Reserve & Politics. • I. Journal #37 pt.A -Read “Critical Thinking Skill” p.432 -Answer questions (1-4) p.432 • II. Quiz#22 • III. Journal#37 pt.B -notes on the Fed & Politics • IV. Mindjogger -video quiz on Chapter#15

16. Board of Governors • Because the Fed is privately owned by its member banks, and because the members of the Board of Governors have 14-year terms of office, the Fed is widely regarded as being an independent monetary authority • Even so, the Fed often comes under political pressure because it has the ability to move interest rates one way or the other • The President or members of Congress up for reelection may call for low interest rates to stimulate the economy • Incumbent politicians know that their reelection chances are better if voters are happy–and voters normally prefer lower interest rates to higher ones • The President and Congress can gain some influence over monetary policy by appointing new members to the Board of Governors as existing terms expire

17. The Fed & Politicians • The Fed is usually reluctant to accommodate demands for lower interest rates in the short term because of the long-run fear of inflation • Unlike many politicians, who frequently focus on interest rates and thereby take a short-term view of monetary policy, the Fed is more concerned about the long-run health of the economy • People tend to use the interest rate, like the unemployment rate, as a measure of the overall health of the economy • In particular, they think the economy is healthy when interest rates are low, and unhealthy when rates are high • This makes it more difficult for the Fed to raise interest rates, especially during election years when incumbents want voters to think that they are doing a good job with the economy