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Monetary Policy

Monetary Policy. Essential Question: How can the Fed use monetary policy to influence the U.S. economy?. Rocket Mortgage Commercial. The Market Interest Rate is Determined by the Availability of Money to Banks. “The Supply and Demand of Money/Loans”. S. Market Interest Rate (in Percent). D.

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Monetary Policy

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  1. Monetary Policy Essential Question: How can the Fed use monetary policy to influence the U.S. economy? Rocket Mortgage Commercial

  2. The Market Interest Rate is Determined by the Availability of Money to Banks “The Supply and Demand of Money/Loans” S Market Interest Rate (in Percent) D Quantity of Money

  3. Problem: The U.S. is experiencing a high level of unemploymentSolution: Enact an expansionary monetary policy High Rate of Unemployment Fed Expansionary Policy

  4. An Expansionary Policy (AKA “Easy Money Policy”) Causes the Market Interest Rate to Fall “The Supply and Demand of Money/Loans” S¹ S² Market Interest Rate (in Percent) D Quantity of Money

  5. Problem: The U.S. is experiencing a high level of unemploymentSolution: Enact an expansionary monetary policy High Rate of Unemployment Fed Expansionary Policy Lower Interest Rate

  6. Automobile Loan Mortgage (Home Loan) Understanding the power of incentives, what actions will lowering the interest rate by 1% encourage? Why? http://www.moving.com/tools/mortgage-payment-calculator/index.asp

  7. Problem: The U.S. is experiencing a high level of unemploymentSolution: Enact an expansionary monetary policy High Rate of Unemployment Fed Expansionary Policy Lower Interest Rate Businesses Hire More Workers More Borrowing More Spending Stores Need More Goods Lower Unemployment Rate

  8. Problem: The U.S. is experiencing a high level of inflationSolution: Enact a contractionary monetary policy High Rate of Inflation Fed Contractionary Policy

  9. A Contractionary Policy (AKA “Tight Money Policy”) Causes the Market Interest Rate to Rise “The Supply and Demand of Money/Loans” S² S¹ Market Interest Rate (in Percent) D Quantity of Money

  10. Problem: The U.S. is experiencing a high level of inflationSolution: Enact a contractionary monetary policy High Rate of Inflation Fed Contractionary Policy Higher Interest Rate Businesses Lay Off Workers Less Borrowing Less Spending Stores Need Fewer Goods Lower Rate of Inflation

  11. The Phillips Curve The Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, lower unemployment in an economy is correlated with a higher rate of inflation.

  12. Monetary Tools of the Fed (These “tools” can be used to increase or decrease the money supply)

  13. Monetary Tools of the Fed (These “tools” can be used to increase or decrease the money supply)

  14. Monetary Tools of the Fed (These “tools” can be used to increase or decrease the money supply)

  15. Monetary Tools of the Fed (These “tools” can be used to increase or decrease the money supply) https://www.newyorkfed.org/markets/primarydealers.html

  16. Monetary Tools of the Fed (These “tools” can be used to increase or decrease the money supply) What is the discount rate now? What is the federal funds rate now? http://www.bankrate.com/rates/interest-rates/prime-rate.aspx

  17. What is the discount rate now? What is the federal funds rate now? http://www.bankrate.com/rates/interest-rates/prime-rate.aspx

  18. Monetary Policy Summarizer: Monetary Tools: Discount Rate, Reserve Requirement, Open Market Operations Scenario #1: U.S. real GDP has decreased during the last two quarters, and the unemployment rate has risen to 6%. Choose one of the fed’s monetary tools listed above to use to fix this problem, and create a flow chart that begins with Recession and ends with Real GDP Growth. Scenario #2: Due to excessive spending, the U.S. inflation rate has increased to 4.5%. Choose a different monetary tool to use to fix this problem, and create a flow chart that begins with High Inflation and ends with Lower Inflation.

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