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

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

The Federal Reserve In Action

What is the Fed? o Central bank of the United States o Established in

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

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

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

Federal Reserve System Structure o Board of Governors o 12 Reserve Banks o Federal Open Market Committee

Where is my Fed?

Where is my Fed?

Federal Reserve Bank of Atlanta

Federal Reserve Bank of Atlanta

Federal Reserve Banks o Distribute the nation’s currency and coin o Serve as banker

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

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

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

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

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.