Inflation: the overall rise in prices – your dollar is worth less.

1. Inflation: the overall rise in prices – your dollar is worth less. • Inflation is caused by excess growth of money and credit relative to the supply of goods and services in the economy. • http://www.federalreserveeducation.org/fed101/policy/money.htm

2. Monetary Policy • Monetary Policy A. The expansion or contraction of the money supply in order to influence the cost and availability of credit. B. Easy Money Policy- The Fed allows the money supply to grow and interest rates to fall, stimulates the economy. C. Tight Money Policy – The Fed restricts the growth of money supply which drives interest rates up.

3. II. Tools of Monetary Policy A. Reserve Requirement • Fractional Reserve System – requires banks and other institutions to keep a fraction of the deposits in the form of reserves • Reserve requirement is a rule stating that a % of every deposit be set aside as legal reserves, coins or currency held in a vault. • The excess reserves- legal reserves over the required amount can be loaned to others.

4. IV. The Fed controls the reserve requirement at banks. What happens if you raise the reserve requirement? Banks have to hold more money in reserve and have less to loan out. This will cause the price of borrowing money to increase.

5. III. Open Market Operations A. The buying and selling of government securities in financial markets. B. When the Fed purchases securities, they buy from the bank and deposit the money into the bank’s account at the Fed, increasing the banks reserves. • When the sell securities, they take the money from the bank’s account at the Fed. http://www.federalreserveeducation.org/fed101/policy/money.htm

6. How would buying securities affect the money supply? It increases the money supply, as the banks reserves increase they have more money to loan out. The interest rates go down.

7. IV. Discount Rate A. The interest rate that the Fed charges on loans to banks. B. The Fed will increase or decrease their interest rate depending on the affect they want to have on the money supply.

8. What would the Fed do to the discount/interest rate if they wanted to increase the money supply? • They would lower the interest rate. Banks then charge customers a lower interest rate and make borrowing money cheaper.

9. V. Other Tools A. Moral suasion- the use of persuasion such as announcements, press releases, and articles in newspapers. B. Selective Credit Controls – credit rules pertaining to loans for specific commodities. a. a required down payment on a home or car.