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MONETARY POLICY AND THE FEDERAL RESERVE (Write that 3 x!!!!!!!!!)

MONETARY POLICY AND THE FEDERAL RESERVE (Write that 3 x!!!!!!!!!). MONETARY POLICY IS A DELIBERATE ATTEMPT BY THE FED TO REGULATE OR STABILIZE THE ECONOMY USING THE TOOLS OF THE FEDERAL RESERVE SYSTEM. Topic: (What are we taking about?). Monetary policy. What is Monetary policy? .

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MONETARY POLICY AND THE FEDERAL RESERVE (Write that 3 x!!!!!!!!!)

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  1. MONETARY POLICY AND THE FEDERAL RESERVE(Write that 3 x!!!!!!!!!)

  2. MONETARY POLICY IS A DELIBERATE ATTEMPT BY THE FED TO REGULATE OR STABILIZE THE ECONOMY USING THE TOOLS OF THE FEDERAL RESERVE SYSTEM

  3. Topic: (What are we taking about?) Monetary policy What is Monetary policy? An attempt by the Fed to fix the economy How can the Fed fix the economy? By using the tools of Monetary Policy What are its tools? RR, DR, OMO

  4. To stop recession…open up the dam; giving people more water/money to use FLOOD GATES OPEN

  5. To fight inflation…shut off the supply ; giving people less water/money to use FLOOD GATES CLOSED

  6. THE FEDERAL RESERVE’S TOOLS TO CONTROL MONETARY POLICY ARE: RESERVE REQUIREMENT DISCOUNT RATE OPEN MARKET OPERATIONS

  7. RESERVE REQUIREMENT THIS IS THE AMOUNT OF EVERY DEPOSIT THAT REMAINS ON RESERVE In other words; it stays in the bank; it remains “on hand.” It cannot be loaned out or borrowed. The reserve requirement is controlled by the Fed. Only the Fed can raise it or lower it. If the Fed raises the reserve requirement; more money stays in the bank.

  8. If the Fed raises the reserve requirement; more money stays in the bank. If more money stays, within the confines of the bank, less is able to be loaned! If less money is loaned out; less money is circulating in the economy! So, if the Fed wants less money circulated , it is because the economy is flooded with currency. There is too much in circulation… THERE IS INFLATION!!! (If there is inflation in the economy; the reserve requirement is raised!)

  9. DISCOUNTRATE The discount rate is the actual rate of interest the Fed charges its member banks. Member banks add on to the percent to determine the rate of interest you will be charged. The Fed raises or lowers the discount rate. The Fed either increases or decreases the amount of interest it charges its member banks.

  10. If the Fed RAISES the discount rate; it makes it harder to get a loan; taking money out of the economy! (b) If the Fed LOWERS the discount rate; it makes it easier to get a loan, putting money into the economy. If the Fed constricts the money supply (to tighten things up,) it puts money into or takes money out of circulation? OUT! IT CONSTRICTS THE FLOW OF THE MONEY SUPPLY. What is happening in the economy for the Fed take this action? INFLATION

  11. OPEN MARKET OPERATIONS Open Market Operations is a term used to refer to the buying or selling of securities (bonds) by the Fed on the Open Market (as opposed to behind closed doors. ) The Fed has the ability to buy or sell bonds to its member banks. If it sells bonds to its member banks; The Fed gets … MONEY! The Fed then takes the money and puts it in a safe place. :O) It has effectively taken money OUT of the economy. This action constrict the money supply. It would make it harder to borrow money. The Fed would take this action during…. INFLATION

  12. SUMMARY OF RR, DR, OMO RESERVE REQUIREMENT CAN GO UP OR DOWN DISCOUNT RATE CAN GO UP OR DOWN OPEN MARKET OPERATIONS ARE BOUGHT OR SOLD DURING INFLATION : RR G DR G OMO :SELL UP, UP, SELL…UP, UP, SELL…UP, UP, SELL WHEN??? DURING INFLATION!!!

  13. Reserve Requirement Reserve Requirement It goes up and down It goes up and down During inflation we* raise it a lot During recession it drops like a rock The Discount Rate works exactly the same as… (go back to top) To the tune of “Three Blind Mice” * “We” refers to the Fed. WHAT ACTION WOULD THE FED TAKE DURING A RECESSION?

  14. Action of the Fed to stop inflation MORE $ $$$ in bank; less in circulation to control spending!) LESS in circulation LESS in circulation LESS in circulation BANKS LESS in circulation

  15. Action of the Fed to fight recession MORE IN CIRCULATION MORE IN CIRCULATION LESS $ in the bank; more in circulation to encourage spending! MORE IN CIRCULATION MORE IN CIRCULATION BANKS

  16. Which is it?: Inflation or Recession Is he putting money in or taking money out of the economy? Does it indicate more or less money in the bank? Which is being depicted: Inflation or Recession?

  17. Chapter 11 + 12 : EZ Quiz 1. WHO CONTROLS MONETARY POLICY? 2. WHAT ARE THE THREE TOOLS OF THE FED? 3. WHAT ARE THE THREE TOOLS OF THE FED AND WHAT ACTION WOULD THE FED TAKE DURING INFLATION? 4. WHAT HAPPENS TO OMO DURING INFLATION? 5. WHAT SHOULD THE FED DO TO ITS DISCOUNT RATE DURING A RECESSION?

  18. Copy the following chart in prep for the second quiz. Fill it in according to the actions the Fed would take during a recession or during an inflation in the following situations…..next slide.

  19. Monetary Policy Quiz 2 1.The economy appears to be slowing down. Stock prices are depressed and the housing market is in a slump. 2. Prices are skyrocketing. Tulips have quadrupled in price. Speculation in the market is rampant. 3. Unemployment has risen to an all-time high. Banks are defaulting and the stock market has been negatively impacted.

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