Transcript I. Administrative Stuff

Economics 2/23/10
http://mrmilewski.com
• OBJECTIVE: Examine the role of Banks.
• I. Administrative Stuff
-Attendance
• II. Film: Modern Marvels Banks
-questions on film about Banks
The Weeks Ahead
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Chapter#15 Test Monday February 28th
ACT Tuesday March 1st
Work Keys Wednesday March 2nd
MME Thursday March 3rd
Chapter#17&18 Test Monday March 7th
Finals 1,2,3 Wednesday March 9th
Finals 4&5 Thursday March 10th
No School Friday March 11th
Third Trimester Starts Monday March 14th
Economics 2/24/11
http://mrmilewski.com
• OBJECTIVE: Examine the Role of the Federal Reserve.
• I. Journal #36 pt.A
-Read “Business Week Newsclip” p.425
-Answer questions (1-2) p.425
• II. Return of Ch#13&14 Test
• III. Quiz#21
• IV. Journal#36 pt.B
-notes on Open Market Operations
The Weeks Ahead
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ACT Tuesday March 1st
Work Keys Wednesday March 2nd
MME Thursday March 3rd
Finals 1,2,3 Wednesday March 9th
Finals 4&5 Thursday March 10th
No School Friday March 11th
Third Trimester Starts Monday March 14th
Weather 2/24/11
Easy v. Tight Money
Figure 15.6
Open Market Operations
• Open market operations–the buying and selling
of government securities in financial markets
• Open market operations are one of the methods
the Federal Reserve can use to influence shortterm interest rates
• Open market operations involve the purchase or
sale of government securities by the Federal
Reserve
Government Securities
• When the Fed purchases gov’t securities, it
increases the supply of money, putting downward
pressure on interest rates (EASY MONEY)
• When the Fed sells gov’t securities, it decreases
the supply of money, putting upward pressure on
interest rates (TIGHT MONEY)
• Open market operations affect the amount of
excess reserves in banks to support new loans
FOMC
• The Federal Open Market
Committee (FOMC) conducts
open-market operations
• The FOMC decides interest rates
and monetary growth
• As a central bank, the Fed makes
loans to other depository
institutions
• discount rate–the interest the Fed
charges on loans to financial
institutions
http://www.ibtimes.com/data/articleimgs/216006-federal-reserve-boards-federal-open-market-committee.jpg
• If the discount rate goes up, fewer
banks will want to borrow from
the Fed, reducing the amount of
money these banks have available
to loan to their customers and
forcing interest rates up & vice
versa
Moral Suasion
• Moral suasion - the use of persuasion such as
announcements, press releases, articles in
newspapers and magazines, and testimony before
congress to control the money supply
• selective credit controls - credit rules pertaining
to loans for specific commodities or purposes
Short-Run Monetary Policy
• In the short run, an
increase or a decrease in
the money supply affects
the interest rate, which is
the price of credit
• When the Fed expands
the money supply, the
cost of credit goes down.
When the Fed contracts
the money supply, the
cost of credit goes up
Short Run Contraction
• Although the Fed tries to
do what it thinks is best
for the economy, people
do not always agree with
its decisions
• In 1981, for example, the
Fed was criticized for
allowing interest rates to
get too high
Monetizing the Debt
• To keep the rates from
going up too high, the
Fed decided to monetize
the debt– create enough
extra money to offset the
deficit spending in order
to keep interest rates from
changing
• The process of
monetizing the debt is
illustrated where DD and
SS represent the initial
demand and supply of
money
Economics 2/25/11
http://mrmilewski.com
• OBJECTIVE: Examine the Secret History of the
Credit Card.
• I. Administrative Stuff
-Attendance
• II. Quiz#22
• II. Frontline: The Secret History of the
Credit Card
-questions on film about credit cards
Economics 2/25/11
http://mrmilewski.com
• OBJECTIVE: Examine the Federal Reserve & Politics.
• I. Journal #37 pt.A
-Read “Critical Thinking Skill” p.432
-Answer questions (1-4) p.432
• II. Quiz#22
• III. Journal#37 pt.B
-notes on the Fed & Politics
• IV. Mindjogger
-video quiz on Chapter#15
Board of Governors
• Because the Fed is privately owned by its member banks,
and because the members of the Board of Governors have
14-year terms of office, the Fed is widely regarded as
being an independent monetary authority
• Even so, the Fed often comes under political pressure
because it has the ability to move interest rates one way
or the other
• The President or members of Congress up for reelection
may call for low interest rates to stimulate the economy
• Incumbent politicians know that their reelection chances
are better if voters are happy–and voters normally prefer
lower interest rates to higher ones
• The President and Congress can gain some influence over
monetary policy by appointing new members to the
Board of Governors as existing terms expire
The Fed & Politicians
• The Fed is usually reluctant to accommodate demands for
lower interest rates in the short term because of the longrun fear of inflation
• Unlike many politicians, who frequently focus on interest
rates and thereby take a short-term view of monetary
policy, the Fed is more concerned about the long-run
health of the economy
• People tend to use the interest rate, like the
unemployment rate, as a measure of the overall health of
the economy
• In particular, they think the economy is healthy when
interest rates are low, and unhealthy when rates are high
• This makes it more difficult for the Fed to raise interest
rates, especially during election years when incumbents
want voters to think that they are doing a good job with
the economy