Item Price in 1981 Inflationadjusted price 2018 Firstclass
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Item Price in 1981 Inflation-adjusted price (2018) First-class stamp $0. 20 Gallon of gas $1. 38 Dozen eggs $0. 90 Gallon of milk $2. 22
The Federal Reserve In Action
What is the Fed? o Central bank of the United States o Established in 1913 o Purpose is to ensure a stable economy for the nation
Roles & Responsibilities o o Conduct the nation’s monetary policy n Monetary policy: the Federal Reserve’s actions to achieve three goals: maximum employment, stable prices, and moderate long-term interest rates in the United States Supervise and regulate banking institutions
Goals of Monetary Policy Full Employment Stable Prices Sustainable Economic Growth
Federal Reserve System Structure o Board of Governors o 12 Reserve Banks o Federal Open Market Committee
Where is my Fed?
Federal Reserve Bank of Atlanta
Federal Reserve Banks o Distribute the nation’s currency and coin o Serve as banker for the U. S. Treasury
Key Tools of Monetary Policy o Discount Rate n o Reserve Requirements n o The interest rate charged by the Federal Reserve to banks that borrow on a short-term (usually overnight) basis The amount of money banks must keep on reserve at the Fed Open Market Operations n n Buying and selling Treasury securities between the Fed and selected financial institutions in the open market Most important tool; directed by the FOMC
Buying/Selling Bonds -Buying Bonds Increase money supply (EXPANSIONARY POLICY) -Selling Bonds Decrease money supply (CONTRACTIONARY POLICY)
Effects of Low Interest Rates o Generally, low interest rates stimulate the economy because there is more money available to lend. n n o Consumers buy cars and houses Businesses expand, buy equipment, etc. Why does the Fed lower interest rates? n If inflation is in check, lower rates stimulate economic activity, thus boosting economic growth.
Effects of High Interest Rates o The Fed raises interest rates as an effective way to fight inflation. n o o Inflation—a sustained rise in the general price level; that is, all prices are rising together. Consumers pay more to borrow money, dampening spending. Businesses have difficulty borrowing; unemployment rises.
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