Every Breath You Take

Monetary and Fiscal Policy Chapters 10, 13, and 14! Stabilizing the Economy Controlling unemployment and inflation (Dual Mandate)! Demand Side Policies Keynesian economics (John Maynard Keynes) Controlled by the Federal Government Pre-Depression - Laissez Faire Post-Depression government active in stabilization Consumer portion of GDP is most important

Monetary and Fiscal Policy! Supply-Side Policies Smaller Role of Government (deregulation, less agencies and lower taxes! Laffer Curve hypothetical relationship between tax rates and tax revenue! Monetary Policies (Milton Friedman) Controlling the Money Supply! Reagan Video

Monetary Policy! The deliberate control of the money supply (& credit conditions) for the purpose of achieving macroeconomic goals.! Purpose of money Medium of exchange Unit value Store value

Monetary Policy! Types of Money! Coin and Currency! Checks / Checking Accounts! Money Supply! M-1 = sum of currency, checking accounts, checks! M-2 = M-1+savings and highly liquid assets

CHAPTER 10: SECTION 3 The Federal Reserve System What Is the Federal Reserve System?! In 1913, Congress passed the Federal Reserve Act. This act established the Federal Reserve System, which is also known as the Fed. Control the Money Supply Supervise the banking system Banker s Bank (Central Bank)! The Board of Governors of the Federal Reserve System is the governing body of the Federal Reserve System.

Federal Reserve Structure

Board of Directors (Governors)! Appointed by the President and Approved by the Senate! 14 year terms! 7 members! Set Monetary Policy Chairman Jenet Yellen (appointed by Pres. Obama) 4 year term

TRANSPARENCY 10-4: The Check-Clearing Process

! The United States is broken up into 12 Federal Reserve districts.! The major policy-making group within the Fed is the Federal Open Market Committee (FOMC). This 12-member policymaking group has the authority to conduct open market operations. (7 AdvisoryCouncil members and 5 Fed presidents)

TRANSPARENCY 10-3: Federal Reserve Districts and Federal Reserve Bank Locations

CHAPTER 10: SECTION 5 Fed Tools for Changing the Money Supply! Monetary Policy Milton Friedman! The Fed has four tools that it can use to raise or lower the money supply. the reserve requirement open market operations the discount rate the federal funds rate

Tight Monetary Policy! Contractionary - a policy that causes the MS to decrease! Lowers inflation! Increases unemployment! Increases interest rates! Lowers GDP! Aggregate Demand decreases

Loose Monetary Policy! Expansionary a policy that causes the MS to increase! Increases inflation! Lowers unemployment! Lowers interest rates! Increase GDP! Aggregate Demand increases

Tools of Monetary Policy Video(7:00 min)

Four Tools of Monetary Policy Changing the Reserve Requirement! The amount of money a bank must keep on hand. Lower reserve requirement = Increase in money supply. Higher reserve requirement = Decrease in money supply.

Conducting Open Market Operations! The Federal Open Market Committee (FOMC) conducts open market operations by buying and selling government securities. Buying Bonds is expansionary Selling Bonds is contractionary Treasury Bills less than a year Treasury Notes 1-10 years Treasury Bonds 15-30 yrs

Changing the Discount Rate! The discount rate is the interest rate the Fed charges a bank for a loan.! When the discount rate is decreased, the money supply rises. When the discount rate is increased, the money supply falls.

! The federal funds rate is the interest rate one bank charges another for a loan. When the rate is decreased, the money supply rises. When the rate is increased, the money supply falls.

! Lag effect of Monetary Policy! Conflicts with Fiscal Policy

Gateway bank! Assets! Cash! Bonds! Loans! Equipment! Fed Funds Sold! Liabilities Deposits (80%) Fed Funds Purchased Other Discount window Broker CD s FHLB borrowin

Income! Interest Income! -Interest expense! =Net Interest Income! -salaries! -rent! -FDIC! =Profit

Credit Crisis! http://www.crisisofcredit.com/

! Ben Bernanke Every Breath You Take