Download Monetary Policy

MONETARY POLICY
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Money & Banking
• Federal Reserve
Money & Banking
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Money
Fiat/Legal Tender – money that has value because a government fiat,
or order, has established it as acceptable for payment of debts.
Medium of Exchange – use of money in exchange for goods or services.
Measure of Value – use of money as a yardstick for comparing the
values of goods and services in relation to one another.
Store of Value – use of money to store purchasing power for later
use.
Banking
Interest Rate – amount of money the borrower must pay for the use
of someone else’s money. Expressed in a percentage.
Prime Rate – rate of Interest banks charge on loans to their best
business customers.
Loans – money that is given with the idea that it will be paid in return.
Collateral – something of value that a borrower lets the lender claim if
a loan is not repaid.
Credit Unions – depository institution owned & operated by its
members to provide savings accounts & low interest loans to its
members.
Savings & Loans – depository institution that, like a commercial bank,
accepts deposits & lends money.
FEDERAL RESERVE
Federal Reserve (FED) – created by Congress in 1913 to “provide for a
safer and more flexible banking and monetary system.”
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FED – 12 Districts – each served by one bank, divided into
territories.
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FED decisions do not have to be ratified by President or Congress.
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Appointments to the Board of Governors – President appoints –
Congress approves.
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FED reports to Congress on its policies.
Purpose of the FED – control nation’s money supply.
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Tight Monetary Policy – makes credit expensive and in short supply
in an effort to slow the economy. (inflation)
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Loose Monetary Policy – makes credit inexpensive & abundant, to
increase money in circulation. (recession)
Goal of the FED – balance the need to create long-term growth in the
economy – more jobs, consumer goods, continuing higher standard of
living – with the need to avoid inflation (higher prices).
Tools of the Federal Reserve
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Discount Rate – the amount of interest that commercial banks pay
the FED for borrowed funds. Banks in turn set their lending rates
for companies, individuals, home mortgages, and auto loans.
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Reserve Requirement – the amount of money banks must hold as
security for loans. The higher the requirement, the less money
banks have to loan. (expressed in a %)
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Buying & Selling Government Securities – bonds and loans the
government has received from private individuals and banks.