Monetary policy

1. Monetary policy • Actions the Federal Reserve takes to influence the level of GDP and the rate of inflation in the economy.

2. The board of governors • The group of people headquartered in Washington D.C. who oversee the Federal Reserve System.

3. Money creation • The process of the Federal Reserve to put dollars into circulation. • Required Reserve Ratio (RRR) • The amount (%) that banks are allowed to • lend. If a bank has $1000 & the RRR is 10%, then this bank may lend $900 and must keep $100 on hand. The higher the RRR the less money in circulation.

4. Open market operations • The buying & selling of government securities (bonds) to alter the supply of money. • When the Fed buys gov’t. securities, it increases the supply of money by increasing bank reserves. When the Fed sells gov’t. securities, it decreases the supply of money by decreasing bank reserves.

5. Discount rate & interest rate • Discount Rate – the rate (%) the Federal Reserve charges for loans to banks • Interest Rate – the rate (%) banks charge for loans to their customers

6. Interest rate changes • When the Fed raises the discount rate (interest rate), money is more expensive to borrow & banks typically lend out less money. • When the Fed lowers the discount rate (interest rate), money is less expensive to borrow & banks typically lend out more money.

7. Easy money policy • Monetary policy that increases the money supply. This is done when the economy is in a recession.

8. Tight money policy • Monetary policy that reduces the money supply. This is done when the economy is experiencing inflation.