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MONETARY POLICY
IS A DELIBERATE ATTEMPT BY THE FED
TO REGULATE OR STABILIZE THE ECONOMY
USING THE TOOLS
OF THE FEDERAL RESERVE SYSTEM
FLOOD GATES OPEN
FLOOD GATES CLOSED
THE FEDERAL RESERVE’S TOOLS
TO CONTROL MONETARY POLICY ARE:
RESERVE REQUIREMENT
DISCOUNT RATE
OPEN MARKET OPERATIONS
(If there is inflation in the economy;
the reserve requirement is raised!)
(a) If the Fed RAISES the discount rate; it makes it harder to get a loan;
(b) 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
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
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!!!
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?
Action of the Fed
to stop
LESS in circulation
LESS in circulation
LESS in circulation
BANKS
LESS in circulation
Action of the Fed to fight
recession
LESS $ in the bank;
more in circulation
to encourage spending!
BANKS
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?
Chapter 11 + 12 : EZ Quiz
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.
RR
1
2
3
DR
OMO
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.