Warmup Who is helped and who is hurt

Warm-up: Who is helped and who is hurt by inflation? 1. Mr. B pays his mom the $1, 000 he borrowed 10 years ago. 2. A lottery winner receiving an annual payment. 3. A widow living on a fixed income.

Unit 4 Macroeconomics • SSEMA 2 • The student will explain the role and functions of the Federal Reserve System • SSEMA 2. a • Describe the organization of the Federal Reserve System. • SSEMA 2. b • Define Monetary policy. • SSEMA 2. c • Describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment and economic growth.

Fiscal Policy Control of the money supply through government policies • Contractionary Fiscal Policy (Tight Money) – Increase Taxes – Decrease Gov’t Spending • Expansionary Fiscal Policy (Easy Money) – Decrease Taxes – Increases Gov’t Spending

What is the second tool we can use to influence the economy? 2. Monetary Policy

Monetary Policy Attempts to influence the economy by changing the supply of money in the economy.

Why does the amount of money matter? • By controlling the money supply, the Fed can influence… Unemployment and Inflation

Why does the amount of money matter? The money supply can also influence inflation and interest rates more money = lower interest rates less money = higher interest rates

• How does the money supply influence interest rates?

The Federal Reserve System (The Fed) • central banking system created by Congress in 1913

The Federal Reserve System (The Fed) Roles • Controls monetary policy (money supply) • Helps control inflation and interest rates

Monetary Policy Expansionary or easy money policy Contractionary or tight money policy • Put more money into the economy • Take money out of the economy

The Fed’s 3 Tools of Monetary Policy 1. Reserve Requirements 2. Discount Rate 3. Open Market Operations

The Fed’s Tools of Monetary Policy 1. Reserve Requirements – Mandatory percentage of deposits that banks must hold on to and cannot lend – Increasing the reserve requirement (lowers money supply) – Decreasing the reserve requirement (increases money supply)

The Fed’s Tools of Monetary Policy 2. Discount Rate – The rate the Fed charges other banks to borrow money – The higher the discount rate, the less banks will wish to borrow and this will contract (decrease) the money supply – A lower discount rate will increase the money supply as banks borrow more

The Fed’s Tools of Monetary Policy 3. Open Market Operations – The Fed buys and sells Treasury Bonds – When the Fed buys bonds, it increases the money supply – When it sells bonds, it contracts the money supply

Review 1. What is the Fed? 2. What roles does the Fed play in the economy? 3. What type of policy would you recommend for the Fed right now?

Homework 1. Choose one… 1. 2. Write a summary of how the Fed uses monetary policy to influence the money supply and interest rates. Or draw a picture to do the same. 2. Answer review questions on pp. 82 -83 of the EOCT text

Learnings • What is fiscal policy and what is it used for? • Explain the two tools (expansionary/contractionary)? A look ahead… • What is the difference between a deficit and the national debt?