Monetary Policy Actions of the Federal Reserve Federal

Monetary Policy Actions of the Federal Reserve

Federal Reserve System Regulate and Supervise Banks Functions Operate nations payment systems Establish and Implement monetary policy

What is Monetary Policy? �Actions to influence the amount of money and credit in the economy to promote economic growth and stability

Types of Monetary Policy Easy Fixes problem of unemployment Tight Puts money into the economy More money = more spending Fixes problem of inflation Takes money out of the economy Less money = less spending

Federal Reserve Structure Board of Governors Federal Reserve Banks Member Banks American People Securities Agencies

Monetary Policy Tools Discount Rate Tools Open Market Operations Reserve Requirement

Monetary Policy Tools �Open Market Operations ◦ buying and selling of government treasury bonds �Bought from banks and security agencies �Buy bonds: increase money supply (easy money policy) �Fights contraction economy �More money = more spending �Sell bonds: decrease money supply (tight money policy) �Fights inflation �Less money = less spending

Monetary Policy Tools �Reserve Requirement ◦ percentage of customer deposits member banks are required to keep on hand. �Lower requirements: increase money supply (easy money policy) �Fights contraction economy �More money = more spending �Raise requirements: decrease money supply (tight money policy) �Fights inflation �Less money = less spending

Monetary Policy Tools �Discount Rate ◦ interest rate the Fed charges banks for loans �Lower rate: increase money supply (easy money policy) �Fights contraction economy �More money = more spending �Raise Rate: decrease money supply (tight money policy) �Fights inflation �Less money = less spending