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Monetary Policy

Monetary Policy. Monetary Policy 2 nd option the federal government has to influence the economy. This is key!! All monetary policy is controlled by the Federal Reserve system. Aka “The Fed Reserve” . The Fed Reserve. What is the Fed Reserve?

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Monetary Policy

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  1. Monetary Policy • Monetary Policy • 2nd option the federal government has to influence the economy. • This is key!! • All monetary policy is controlled by the Federal Reserve system. • Aka “The Fed Reserve”

  2. The Fed Reserve • What is the Fed Reserve? • The central banking system in the United States. • What does it do? • It controls how much money is in circulation. • How? • Loans money to the banks in America.

  3. How the Fed Reserve works • Fed Reserve has a Board of Governors • 7 members vote on what interest rates to put on loans to banks in America. • Leader is Ben Bernanke. • Fed Reserve Chairman

  4. Fed Reserve Districts • The Fed Reserve has district banks • These district banks oversee all banks in their area.

  5. Making Monetary Policy • Fed Reserve has 3 tools to implement monetary policy: • Reserve requirements • The discount rate • Open market operations

  6. Reserve Requirements • The Fed Reserve sets the requirements (rules) for banks in the U.S. • Most important rule: • Determining the minimum amount of money that a bank must keep on hand at all times! • Keeps you from not getting your money. • What happens if everyone wants their money at the same time? • FDIC (Federal Deposit Insurance Corporation) • Guarantees your money up to $250,000

  7. Discount Rate • Discount rate • The interest rate that the Fed Reserve charges banks to get money. • Why does the Fed Reserve charge interest to banks? • Keep them from asking for lots of money. • Banks won’t want to take as much if they have to pay large interest on it. • Example: If a bank wants $15 million to loan out, the Fed will charge them 10% interest. • This forces banks to charge higher interest rates for loans to the consumer. • Who is going to take a loan with higher interest rates?

  8. Open Market Operations • Open Market Operations • Purchase or sale of bonds in order to finance the operations of government. • Bonds • Certificates issued by government to a lender from whom it has borrowed money. • How does it work? • Pay $500 now • Wait 10 Years • Get $1000 back!

  9. Negatives to monetary policy • It takes a long time to take effect! • Bonds must be sold! • Can be done quickly!!! • Unless people are skeptical and decide to save their money. • Loans take time to be passed out. • Too long! Need money now!

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