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Every Breath You Take
Every Breath You Take
Monetary and Fiscal Policy
Chapters 10, 13, and 14
!   Stabilizing the Economy – Controlling unemployment and
inflation (Dual Mandate)
!   Demand Side Policies – Keynesian economics (John Maynard
Keynes)
•  Controlled by the Federal Government
•  Pre-Depression - Laissez Faire
•  Post-Depression –government active in stabilization
•  Consumer portion of GDP is most important
Monetary and Fiscal Policy
!   Supply-Side Policies – Smaller Role of Government (deregulation,
less agencies and lower taxes
! Laffer Curve – hypothetical relationship between tax rates and
tax revenue
!   Monetary Policies – (Milton Friedman) Controlling the Money
Supply
!   Reagan Video
Monetary Policy
!   The deliberate control of the money supply (& credit conditions)
for the purpose of achieving macroeconomic goals.
!   Purpose of money
•  Medium of exchange
•  Unit value
•  Store value
Monetary Policy
!   Types of Money
!   Coin and Currency
!   Checks / Checking Accounts
!   Money Supply
!   M-1 = sum of currency, checking accounts, checks
!   M-2 = M-1+savings and highly liquid assets
CHAPTER 10: SECTION 3
The Federal Reserve System
What Is the Federal Reserve System?
!   In 1913, Congress passed the Federal Reserve Act. This act
established the Federal Reserve System, which is also known
as “the Fed.”
•  Control the Money Supply
•  Supervise the banking system
•  Banker s Bank (Central Bank)
!   The Board of Governors of the Federal Reserve System is
the governing body of the Federal Reserve System.
Federal Reserve Structure
Board of Directors (Governors)
!   Appointed by the President and Approved by the Senate
!   14 year terms
!   7 members
!   Set Monetary Policy
•  Chairman Jenet Yellen (appointed by Pres. Obama)
•  4 year term
TRANSPARENCY 10-4: The Check-Clearing Process
!   The United States is broken up into 12 Federal Reserve
districts.
!   The major policy-making group within the Fed is the Federal
Open Market Committee (FOMC). This 12-member policymaking group has the authority to conduct open market
operations. (7 AdvisoryCouncil members and 5 Fed
presidents)
TRANSPARENCY 10-3: Federal Reserve Districts
and Federal Reserve Bank Locations
CHAPTER 10: SECTION 5
Fed Tools for Changing the Money Supply
!   Monetary Policy – Milton Friedman
!   The Fed has four tools that it can use to raise or lower the
money supply.
•  the reserve requirement
•  open market operations
•  the discount rate
•  the federal funds rate
Tight Monetary Policy
!   Contractionary - a policy that causes the MS to decrease
!   Lowers inflation
!   Increases unemployment
!   Increases interest rates
!   Lowers GDP
!   Aggregate Demand decreases
Loose Monetary Policy
!   Expansionary – a policy that causes the MS to increase
!   Increases inflation
!   Lowers unemployment
!   Lowers interest rates
!   Increase GDP
!   Aggregate Demand increases
Tools of Monetary Policy Video(7:00 min)
Four Tools of Monetary Policy
Changing the Reserve Requirement
!   The amount of money a bank must keep on hand.
•  Lower reserve requirement = Increase in money supply.
•  Higher reserve requirement = Decrease in money supply.
Conducting Open Market Operations
!   The Federal Open Market Committee (FOMC) conducts open
market operations by buying and selling government
securities.
•  Buying Bonds is expansionary
•  Selling Bonds is contractionary
•  Treasury Bills – less than a year
•  Treasury Notes – 1-10 years
•  Treasury Bonds – 15-30 yrs
Changing the Discount Rate
!   The discount rate is the interest rate the Fed charges a bank
for a loan.
!   When the discount rate is decreased, the money supply rises.
When the discount rate is increased, the money supply falls.
!   The federal funds rate is the interest rate one bank charges
another for a loan.
•  When the rate is decreased, the money supply rises.
•  When the rate is increased, the money supply falls.
!   Lag effect – of Monetary Policy
!   Conflicts with Fiscal Policy
Gateway bank
!   Assets
!   Liabilities
!   Cash
•  Deposits (80%)
!   Bonds
•  Fed Funds Purchased
!   Loans
•  Other
!   Equipment
•  Discount window
!   Fed Funds Sold
•  Broker CD’s
•  FHLB borrowin
Income
!   Interest Income
!   -Interest expense
!   =Net Interest Income
!   -salaries
!   -rent
!   -FDIC
!   =Profit
Credit Crisis
! 
http://www.crisisofcredit.com/
Every Breath You Take
!   Ben Bernanke