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Monetary Policy
Monetary Policy is changes the Federal Reserve (the FED)
makes in the money supply.
Definitions
'Expansionary Monetary Policy'

An increase in the money
supply
Definitions
'Contractionary Monetary Policy’

A decrease in the money
supply
Monetary Policy
$

Manipulating the money $upply through
the Federal Reserve System

Who controls the money supply?

In Plain English: Understanding the Federal Reserve
The Federal Reserve System

The Federal Reserve System is the Central Bank of
the United States.

In charge of managing the nation’s money supply
and ensuring the health of the banking system

Janet Yellen is Federal Reserve Chairman

Jacob Lew is Secretary of the Treasury
The Fed’s Four Main
Responsibilities
1.
Formulate and implement the nation’s
monetary policy—control the money supply!
2.
Supervise and regulate banking institutions
and protect consumers
3.
Maintain the stability of the financial system
4.
Provide certain financial services to the U.S.
government, the public, financial institutions,
and foreign government institutions
The Fed's 3 Main Tools of
Monetary Policy
1.
Open Market Operations
2.
Changes in the Discount Rate
3.
Changes in Reserve
Requirements
1. Open Market Operations

Fed’s primary monetary policy tool

Determines whether government treasury
securities (bonds) should be bought or sold
EOC study guide
Macroeconomics #19
continued
1. Open Market Operations Cont.

Expansionary Monetary Policy:
Buying treasury securities:

increases growth by putting more money in
circulation (Fed pays for securities putting $ into
the reserves, banks can lend more $)
EOC study guide
Macroeconomics #19
continued
1. Open Market Operations Cont.

Contractionary Monetary Policy:
Selling treasury securities:

slows growth by taking money out of circulation
(Fed sells securities back to banks, money moves
from banks to Fed, decreasing the supply of
excess reserves available to lend)

Investopedia video on OMOs
EOC study guide
Macroeconomics #19
continued
2. Discount Rate

The amount interest the federal
reserve will charge to loan money
to banks
 Known
as the lender of last resort
 Currently
the rate is 1%
 Investopedia
video clip
EOC study guide
Macroeconomics #19
continued
2. Discount Rate Cont.

Expansionary Monetary Policy:
 If
the Fed decreases the rate, it is
cheaper for banks to borrow money
 Contractionary
Monetary Policy:
 If
the Fed raises the rate, it is more
expensive for banks to borrow money
EOC study guide
Macroeconomics #19
continued
3. Reserve Requirements

Reserve requirements are funds (cash, etc.)
that banks must keep in its vaults

Currently it is 10% of demand deposits

If you deposit $1000, $900 is available to lend
($100 left in reserves)
EOC study guide
Macroeconomics #19
continued
http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1
3. Reserve Requirements
Cont.

Expansionary Monetary Policy:

If the Fed decreases the reserve requirements,
it increases the supply of loanable funds and
increases the growth of the money supply
 Contractionary
Monetary Policy:
 If
the Fed raises the reserve
requirements, it decreases the supply
of loanable funds and slows the growth
of the money supply
EOC study guide
Macroeconomics #19
continued
Problems in Controlling the
Money Supply

The Fed’s control of the money supply is
not precise

The Fed does not control the amount of money
that households choose to hold as deposits in
banks.

The Fed does not control the amount of money
that bankers choose to lend.

Summary Investopedia Video clip