Transcript 12/14 Monetary Policy review ppt

Monetary Policy
review
huh???? can you break it downnnnn???


Monetary policy – things the Federal
Reserve does to regulate the economy &
influence the rate of inflation by increasing
or decreasing the money supply
the actions will depend upon where in the
business cycle the economy is…..
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A period of contraction (recession)
- means that the economy has slowed
way down
– unemployment is high, people aren’t
spending or borrowing money, the
economy is not growing
What will the Fed want to do?
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when the economy is in a recession
(contraction) the Fed will want to increase
the money supply to get the economy
moving & growing again
How do they do thattttt????????
Easy Money policy!!
1. decrease the discount (interest) rate
 this encourages people to take out loans
which increases the amount of money in
circulation!
2. Reduce the reserve requirements
 when banks have to keep less money in
reserves, they can lend more money out
…which increases the amount of money in
circulation!
3. “Open market operations” – buy
government bonds
 the Fed buys the bonds using Federal
Reserve funds
…….. which increases the amount of money in
circulation!
Oh…..I get it!!! ……..but what about…..

A period of expansion
- means that the economy has been steadily
growing
- interest rates are high, unemployment is
low
- inflation – prices increasing
…so…what will the Fed do nowwww??

when the economy is in an expansion, the
Fed will want to decrease the money
supply to slow the economy down and
reduce inflation
…..how…..??????
Tight Money policy!!
1. Increase the discount (interest) rate
 this will discourage people from taking
out loans, which will decrease the amount
of money in circulation
2. Increase the reserve requirements
 banks will have to keep more money in
reserves, and will have less money to lend
out
….which will decrease the amount of money
in circulation
3. “Open market operations – sell
government bonds
 the money received for the bonds is
taken out of the market
….which decreases the amount of money in
circulation!