Post on 06-Jan-2016
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Finish Your Monetary Policy Drawings
(You’ve Got 15 Minutes)
ALSO: Bu.L.L. Poster!
ALSO: Partners!
After loaning the government $$$
• You are left holding a bond.
• If it’s a 10 year bond, you’ll get paid interest each year.
• And receive the “purchase amount” back in 10 years.
OR...
• Maybe you don’t want to wait 10 years.
• Something comes up, and you want your cash now!
• In that case you could sell that bond to someone else.
How the Fed controls the money supply...
(drum roll)
The Fed buys or sells bonds in the open market
• The Fed can print money, and BUY bonds from the public.
• This INCREASES the money supply.• Which makes interest rates go ___• which makes people/businesses borrow MORE• AND spend MORE (C & I go up)• so AD increases, and Real GDP increases• and recession ends (yay!!)
Think of a dam…
• A dam controls the flow of water downriver.
• Releasing too much water would cause flooding.
• Too little water would cause a drought.
The Fed is like a dam...
• & the river is the $ supply.
• Too much $ causes inflation.
• Too little $ causes a recession.
Federal Reserve
Money Supply
So, to fight inflation, the Fed should...
• Sell bonds.
• Which will shrink the money supply,
• and make dollars more valuable.
Relationship between unemployment, inflation, and
Real GDP.
Quiz
1. Population = 100Employed = 30
Not employed but looking = 20What is the unemployment rate?
• A) 10%• B) 20%• C) 30%• D) 40%
2. A gulfstream employee gets laid off because of the recession. What type of
unemployment is this?
• A) Structural
• B) Cyclical
• C) Frictional
• D) Seasonal
3. You are fired from your job because your boss doesn’t like you. What kind of
unemployment is this?
• A) Structural
• B) Cyclical
• C) Frictional
• D) Seasonal
4. A CD store goes out of business as more people buy music online. What kind of unemployment do the store
employees have?
• A) Structural
• B) Cyclical
• C) Frictional
• D) Seasonal
5. When a period of steady work is followed by a period of unemployment
each year.
• A) Structural unemployment
• B) Cyclical unemployment
• C) Frictional unemployment
• D) Seasonal unemployment
6. When the skills of workers don’t match the jobs available.
• A) Structural unemployment
• B) Cyclical unemployment
• C) Frictional unemployment
• D) Seasonal unemployment
7. When the Fed sells bonds, the money supply…
• A) increases
• B) shrinks
8. When the Fed sells bonds, interest rates…
• A) rise
• B) fall
9. The Fed is most likely to lower interest rates…
• A) when we are in a recession.
• B) when inflation is high.
10. The Fed is most likely to sell bonds…
• A) when we are in a recession.
• B) when inflation is high.
Federal Reserve (the “Fed”) Structure and Functions
What are banks good for?
• What services do banks provide??
• Banks:
• hold our money
• lend us money
• process check and debit card transactions
The Federal Reserve or “Fed”
• IS A “BANK FOR BANKS”.
• The Fed– holds money for banks (and the government)– lends money to banks (and the government)– processes transactions between banks– monitors bank reserves
• percent of deposits banks must hold
• currently 10% of all deposits
The Fed’s Structure
• Privately owned, publicly run.
• Banks own it– they buy stock in it
• The president appoints the Board of Governors
• Governors serve staggered 14-year terms.
• One of the governors is made “Chairman of the Fed”.
Federal Reserve Bank – Atlanta District
Strong-Like-Bull Rule
• If Real GDP is in a lull, Bu.L.L.
• (Buy bonds, Lower federal funds rate, Lower discount rate)
Federal Open Market Committee
• (part of the Federal Reserve)
• Controls MONETARY POLICY– interest rates– the money supply
• the Fed prints our money
• & controls it’s circulation
Monetary Policy Handout
Check-Clearing Simulation
Board of Governors Simulation
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
World’s most powerful people 2010.
(according to Forbes)
Ben Bernanke
• Chairman of the Fed, June ‘05-Today
• 60 Minutes Video
1. Who owns the Fed?
• A) citizens
• B) banks
• C) the government
2. Who runs the Fed?
• A) the President
• B) Congress
• C) The Board of Governors
3. Who appoints the Board of Governors?
• A) The President
• B) Member Banks
• C) The Chairman of the Fed
• D) Citizens by Vote
4. The Fed is short for the
• A) Federal Reserve
• B) Federal Government
• C) Federal Bureau of Investigation
5. Which part of the Fed controls monetary policy?
• A) The Chairman of the Fed
• B) The Federal Open Market Committee
• C) The Board of Governors
• D) The Member Banks
6. What does monetary policy involve?
• A) taxes and spending
• B) money supply and interest rates
• C) A & B
• D) taxes and interest rates
• E) spending and money supply
7. The Federal Reserve
• A) holds money for banks
• B) lends money to banks
• C) processes transactions between banks
• D) lends money to the government
• E) all of the above
End