Transcript L3A Monetary Policy PPT

Monetary Policy
© 2009, TESCCC
Monetary Policy
• Federal Reserve policy of regulating
the availability of money and credit
in the economy to deal with
economic
instability.
© 2009, TESCCC
Major Tools of the Fed
1. Reserve Requirement- the percentage
of total deposits that the Fed requires
banks to hold back and not loan out
2. Discount Rate- Interest rate the Fed
charges member banks
3. Open Market Operations-FOMC or
Federal Open Market Committee buys
and sells government bonds and
securities.
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Minor Tools
1. Moral suasion- unofficial pressure by
the federal Reserve to try and change
economy. This could be through press
releases or speeches to Congress.
2. Margin Requirements- SEC
oversees buying of stocks and
securities to prevent another stock
market crash.
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Easy Money Policy
•
•
•
•
Recession phase of business cycle
Unemployment is the problem
Goal is to increase the money supply
Fed’s Major Tools
1. Reserve Requirement- Decrease reserve
requirement. More money available for banks
to loan out. More loans will create more money
in the economy.
© 2009, TESCCC
2. Discount Rate – Decrease discount rate.
Makes it cheaper for banks to get a loan
from the Fed, so banks will charge lower
interest rate to you. This makes getting a loan
more attractive so more people will get
loans.
3. Open market – The Fed will buy on the
open market. The Fed will purchase
government securities with money. This is
money that had not been out in the economy so
this will increase the money available in the
economy.
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The Money Market
Rate of interest, i (percent)
Sm
ie
Dm
0
Amount of money demanded
(billions of dollars)
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Rate of interest, i (percent)
Easy Money Policy
Sm
Sm2
i1
i2
Dm
0
Amount of money demanded
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Tight Money Policy
•
•
•
Expansion phase of business cycle
Inflation is the problem
Goal is to decrease the money supply
1.
Raise Reserve Requirement- This will cause banks to
have less money available for loans. Less loans will
mean that less money is created in the economy so this
will decrease the money supply.
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2. Raise Discount Rate- This will make it more expensive for
a bank to get a loan from the Fed so banks will increase
the interest rates that they charge individuals. Higher
interest rates will make getting a loan less attractive so
fewer people will get loans.
3. Sell on open market- FOMC will sell government
securities on the open market. The Fed takes this money
and locks it up in the vault at the Fed so this decreases the
available money in the economy.
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The Money Market
Rate of interest, i (percent)
Sm
ie
Dm
0
Amount of money demanded
© 2009, TESCCC
Tight Money Policy
Rate of interest, i (percent)
Sm2
Sm
ie
Dm
0
Amount of money demanded
© 2009, TESCCC
Limitations of Monetary Policy
1. Economic forecasting is not exact; human
behavior is not always predictable.
2. Time lag – It takes the government time to
gather financial information, analyze it and
formulate a policy, and then implement
3. Can’t fight stagflation4. Lack of coordination with government policies
(conflicting priorities between actors in the economy
including the President/Congress and the budget,
Treasury, Fed Policies, the markets)
© 2009, TESCCC