Download CP World History (Unit 7, #2)

CP Economics (Chapter 16) GPS SSEMA2
Name ______________________________
Date ___________________ Period______
The Federal Reserve System and Monetary Policy
Warm Up #33
Question
Answer
Who controls how much money is in circulation, meaning, how
it is made and how it is spent, and explain how they got that
power?
I. The Federal Reserve and Monetary Policy
A. KEY CONCEPTS
1. ______________________________ includes all the Federal Reserve actions that change the money supply in order to influence the economy. Its purpose is to
curb ____________________ or to reduce economic stagnation or ______________________.
B. WHY THE CONCEPT MATTERS
2. Monetary policy is one of the most important tools for addressing _______________ in the business cycle.
II. The Federal Reserve Today
A. Structure and Organization of The System
1. The ___________________________________ was created by the Federal Reserve Act in 1913. The Board of Governors, located in Washington, D.C.,
provides the leadership for the System. ____________________ ____________________ Federal Reserve Banks and their branch offices carry out many of the
System’s day-to-day activities.
B. Organization of Federal Reserve
C. Board of Governors
1. Directs operations of the _____________
2. Establishes policies: i.e. ____________________________ and ____________________
3. Supervises 12 district Federal Reserve Banks
4. 7 members appointed by President with ______________________ approval; 14 years
5. Most Powerful Person: _____________________________
D. __________________________________________________
1. Meets 8-10 times per year
2. ___________________________________________
3. Decides the course of action the FED should take to ______________________________
4. Uses tools of ______________________________________________
E. FOMC’s Open Market Operations.
1. The domestic trading desk then buys or sells Treasury securities on the open market. “_________________________”-means that the Fed (FOMC) does
business with securities dealers who compete on the basis of price. When the Fed (FOMC) wishes to ____________________ reserves, it ________________
securities; when it wishes to ____________________ reserves, it ________________ securities. Open market operations ultimately affect interest rates and the
performance of the U.S. economy.
F. Most Important Function of “The FED”
1. Control over the rate of growth of the __________________________ (regulating amount of $ in circulation)
Other Functions
2. ____________________ checks
3. Serves as government’s banker
4. ___________________________________
5. Supervising member banks
6. Holding and setting _______________________________________________
7. Supplying paper currency
III. Monetary Policy
A. Involves changing the rate of growth of the supply of money in ___________________ to affect the amount of credit, and therefore, business activity in the
economy.
B. __________________Money Policy: = credit is inexpensive to borrow and abundant and tries to _____________________ aggregate demand.
C. _________________Money Policy: = credit is expensive and in short supply and to _________________________ business activity.
D. *Goal of Monetary Policy is to _________________ and _______________________ the nation’s monetary system.
IV. The Fed’s Monetary Tools
A. KEY CONCEPTS
1. ____________________________- actions the Fed takes to change money supply
i. purpose is to _______________________ the economy
ii. Fed has three courses of action to take individually or in combination
2. Action 1: _________________________________________________
i. Open market operations- sales and purchase of government _____________________
ii. Fed ________________ securities to ___________________ money supply; ________________ to contract supply
iii. Federal funds rate/ratio (FFR)- ______________________ rate banks charge one another
iv. Fed signals intent to buy or sell by announcing a target for the FFR
a. if _________________________ target, Fed ________________ __________;
if ___________________________ target, it ________________ ___________
3. Action 2: ______________________________________________________
i. Fed changes required reserve ratio to change the money supply
a. ______________________ in RR __________________ money supply;
b. ______________________ in RR __________________ money supply
ii. RR averages 10-12% for transaction deposits, 0-3% for time deposits
4. Action 3: ______________________________________________________
i. ________________________________- interest rate ___________ charges on loans to other banks
a. affects money supply because it determines _____________________________ have to lend
ii. _______________________________-interest rate banks charge their ___________________________________________
a. other borrows pay 2-3 percentage points above prime
iii. If discount rate rises, so do prime, business and consumer rates
V. Approaches to Monetary Policy
A. KEY CONCEPTS
1. Monetary policy used to promote __________________ and _________________.
2. _____________________________ monetary policy- plan to _________________ the money supply
3. _____________________________ monetary policy- plan to _________________ the money supply
B. Policy 1: _____________________________________
1. Expansionary monetary policy also called ________________________________
2. In a ________________________, the Fed increases money supply to ______________________ aggregate demand
i. Fed can ________________ ____________ on the open market, decrease RRR or discount rate
ii. *most common practice is to buy bonds to make interest rates fall
C. Policy 2: _______________________________________
1. ___________________________ is another name for contractionary monetary policy
2. In ________________________________ times, the Fed decreases money supply to _____________________ (decrease) aggregate demand
3. Fed can _________________ _________________ on open market, increase RRR or discount rate
i. *most common practice is to sell bonds to raise interest rates
Closure Activity #29
Based on your notes answer the following questions.
1. Who regulates the money supply?
2. What does the FOMC do?
3. Explain open-market operations.
4. In a recession to create more money what would the Fed do?