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MONETARY POLICY
BY: Dominique Coleman & Imani Ashmeade
WHAT IS MONETARY POLICY ?
• The actions of a central bank, currency board or other
regulatory committee that determine the size and rate of
growth of the money supply, which in turn affects interest
rates.
N.d. Photograph. Econmatters.com. Web. 12 May 2013.
WHAT IS MONETARY POLICY ?
• Monetary policy is maintained through actions such as
increasing the interest rate, or changing the amount of money
banks need to keep in the vault (bank reserves).
N.d. Photograph. American.com. Arthur C.
Brooks. Web. 12 May 2013.
HOW DOES MONETARY POLICY
OPERATE IN AMERICA ?
In the United States, the
Federal Reserve (The Fed) is
in charge of monetary policy.
Monetary policy is one of the
ways that the U.S.
government attempts to
control the economy and
control inflation.
N.d. Photograph. Nytimes.com. Arthur Sulzberger
Jr. Web. 12 May 2013.
HOW DOES MONETARY POLICY
EFFECT INFLATION?
• If the money supply grows too fast, the rate of inflation will
increase; if the growth of the money supply is slowed too
much, then economic growth may also slow.
• In general, the U.S. sets inflation targets that are meant to
maintain a steady inflation of 2% to 3%.
N.d. Photograph. Billshrink.com. Web. 12 May 2013.
<http://www.billshrink.com/blog/7050/>.
HOW DOES MONETARY POLICY
OPERATE IN AMERICA ?
• In order to control inflation and the amount of money in circulation, The
Federal Reserve uses three main tools;
 The Reserve Requirement – This is the amount banks must keep on
reserve at the end of the day.
 The Discount Rate – This is the interest rate The Federal Reserve charges
to allow banks to borrow funds from their discount window.
 The Feds Funds Rate – The Fed funds rate is the rate that banks charge
each other for overnight loans to meet these reserve balances. These loans
are known as the Fed funds. This tool is used a lot more often because it is
the easiest to modify.
HOW DOES MONETARY POLICY
EFFECT UNEMPLOYMENT?
• Monetary policy directly effects the country's unemployment
rate through interest rates.
 The interest rate is the percent charged, or paid, for the use of
money. It is charged when the money is being borrowed, and paid
when it is being loaned.
• Lower interest rates allow families to borrow more cheaply to
buy what they need, like cars, homes and consumer electronics.
This stimulates enough demand to put the economy back on
track.
• Low interest rates also allow businesses to borrow for less,
giving them the capital to hire new workers to meet rising
demand.
CURRENT MONETARY POLICY IN
THE UNITED STATES
• “Since 2007, the Fed has had its hands full preventing, not inflation, but a
global depression. During the banking crisis, the Fed created many
innovative programs that quickly pumped trillions of dollar of liquidity
into the economy to keep banks solvent. Many were worried that this
would create inflation once the global economy recovered. However, the
Fed developed an exit plan to wind down the innovative programs. For
example, it created a Certificate of Deposit program to mop up excess
credit in banks.”
-“What is Being Done to Control Inflation?" About.com US Economy
CURRENT MONETARY POLICY IN
THE UNITED STATES
The Fed has recently come up with another tool to manage inflation;
• In it the Fed actually encourages inflation at a specific rate that they decide
on.
• Currently that rate is 2%, excluding gas and food.
Why is this tool effective?
• Small amounts of inflation encourages economic growth. This is because
when people expect prices to rise, they tend to buy more now to avoid
future price increases. This generates the demand needed for a healthy
economy.
BIBLIOGRAPHY
• "Monetary Policy." Definition. N.p., n.d. Web. 09 May 2013.
• "Unemployment Solutions." About.com US Economy. N.p., n.d. Web. 09
May 2013.
• "What Is Being Done to Control Inflation?" About.com US Economy.
N.p., n.d. Web. 30 Apr. 2013.
• "Current FAQsInforming the Public about the Federal Reserve." FRB:
How Does Monetary Policy Influence Inflation and Employment? N.p.,
n.d. Web. 30 Apr. 2013.
REVIEW QUESTION
How can a certain amount of
inflation be a good thing ?