Transcript Setting Interest Rates

The Federal
Reserve
System
The FED
Monetary Policy
What is the Fed?
The Federal Reserve:
serves as the nation’s bank
regulates the county’s banking system
regulates the country’s money supply
The Fed sets the Monetary Policy - actions
taken by the Fed to influence production
(GDP) and inflation in the economy.
Functions of the Federal Reserve
Setting Reserve Requirements - The
Fed determines how much money
banks are required to keep. This
ensures that banks will have enough
funds to supply customer’s withdrawal
needs.
Setting Interest Rates - This
determines the cost of borrowing
money.
Functions of the Federal Reserve
Open Market Operations - the buying or selling
off of government securities (bonds) to alter the
supply of money.
In order to increase the money supply the Fed
purchases government bonds from its reserve funds
and deposits them in the bank. This puts money into
circulation.
Functions of the Federal Reserve
In order to decrease the money supply, it
makes an open market bond sale. The Fed sells
securities back to bond dealers to take money out of
circulation.
How Monetary Policy Works:
Monetary Policy alters the supply of
money. The supply of money then
affects interest rates. Interest rates
affect the level of spending in the
economy.
Loose Money Supply
Money Interest
Supply Rates
High High
Demand Production
In this way, the FED can increase
production (GDP)
Tight Money Supply
Money Interest
Supply Rates
Low Low
Demand Production
If the economy is experiencing rapid expansion
that may cause high inflation, the FED uses this
policy to slow expansion.
Even though it can only alter the
money supply, the Fed has a great
impact on the economy.
Inflation
Deflation
Money
Value
Low Interest
Rates
High Interest
Rates