ECO 372 Week 4 Presentation (1)

8/12/2019 ECO 372 Week 4 Presentation (1)

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WHY DOING BUSINESS WITH

THE U.S IS THE RIGHTDECISION

THE INSIDE LOOK OF THE

FEDERAL RESERVEAlana Medina

ECO 372

February 24, 2014

Dr. Robert Larkin


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The Federal Reserve System, also known as "The Fed,"is the central bank of the United States. In Decemberof 1913, the Fed was created by the congress with theobjective of provide the nation with a more flexible,

safer, and stable monetary and financial system.As the bank of the federal government, the Fed alsohas the responsibilities of being the role model as wellas the bank to all the financial institutions within the

United States.

The Federal Reserve System includes the Board ofGovernors and the twelve regional Reserve Banks.


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WEAKECONOMY

LOWEMPLOYMENTLEVELS

HIGHPRICESFLUCTUATION

LOW ECONOMYPRODUCTION

CAPACITY

HIGHFEDERALFUNDSRATES

The discount rate is the interest rate at which an eligiblefinancial institution may borrow funds directly from a Federal

Reserve bank.

Some of the factors that influence the fed to adjust the

discount rate are: a weak economy, the low employment rates,

fluctuation in prices, low economy production of goods and

services, and high federal fund rates, which in turn influences

inflation and overall interest rates because of the highavailability of money.


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LOWERDISCOUNTRATES

1. BANKSBORROWMORERESERVES

2. INCREASEINLOANOFFERS

3. LOWERINTERESTRATES

INCREASE DISCOUNTRATES

1. BANKRESERVEDECREASE

2. FEWERLOANSOFFERS

3. HIGHERINTERESTRATES


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HOW DOES MONETARY

POLICY AIM TO AVOID

INFLATION? CONTRACTIONARY MONETARY POLICY SELLING OF U.S. TREASURY SECURITIES-OPEN MARKET OPERATIONS

INCREASE IN THE DISCOUNT RATE

INCREASE IN RESERVE REQUIREMENTS

CONTROL MONEY CREATION

INCREASE IN GOVERNMENT SPENDING

DECREASE IN TAXES


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Influencing inflation takes a long time and has to be looked

at as a long-term goal, as a result, the Fed watches

economic indicators closely to determine in which the

direction the economy is going so it can applies its

policies. In the case of forecasting an increase in inflation

the, the Fed uses the contractionary monetary policy help

to decrease the money supply and raising interest rates.

This policy is applied for the purpose of putting the brakes

on an overheated business-cycle expansion and to address

the problem of inflation.

Monetary policies are the regulation

and actions the Fed takes to

influence financial conditions in

order to achieve its goals, which are

but not limited to maximizeproduction and employment and

stabilize prices, as specified in a

1977 amendment to the Federal

Reserve Act.


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HOW DOES MONETARY POLICY CONTROL

THE MONEY SUPPLY?

WITHMOREMONEY, AGGREGATEEXPENDITURESAREGREATER

LOWINTERESTRATES INVESTMENT

EXPENDITURES

GOVERNMENTPURCHASES

NETEXPORTS

CONSUMPTIONEXPENDITURES

The money supply is the quantity of money

that exists in the economy. It is the function of

the Federal government to control the total

amount of money circulating within the

economy; the Fed control the money supply

through its monetary policy. The money

supply as an aggregate demand determinantcauses changes in aggregate demand and shifts

of the aggregate demand curve.

In the case that the Fed intent to prevent a recession on the business-cycle

horizon, the fed decides to expand the money supply. As a result of the

extra money circulating in the economy, the purchasing power of all four

sectors household, business, government, and foreign improve.


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WITHLESSMONEY, AGGREGATEEXPENDITURESARE

LOWER

HIGHINTERESTRATES

INVESTMENTEXPENDITURESDECREASE

GOVERNMENTSPENDINGSTOPS

NETEXPORTS

CONSUMPTIONEXPENDITURESDECREASE

HOW DOES MONETARY POLICY CONTROL

THE MONEY SUPPLY?

In the case that Fed is trying to prevent inflation it might decide to reduce the money supply. As a

result of the decrease in money circulating about the economy, the purchasing power of all four

sectors household, business, government, and foreign is restricted.

Fearing the beginning of higher inflation, the Fed might decide to reduce the money supply by

applying its contractionary policy. Everyone is willing and able to buy less real production at the

existing price level, which decrease consumption expenditures.


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P O T E N T I A L E C O N O M I C S T I M U L U S :

1. TAXCUTSFORINDIVIDUALS

2. TAXCUTSFORCOMPANIES

3. EXPENDITURESONPUBLICWORKS

4. INVESTMENTSINRESEARCHANDDEVELOPMENT

Most government stimulus are follow by an increase in the money supply to the economy.

Some of the different ways of improving the economy are via tax cuts for individual as wellfor businesses because encourage spending and investments, government spending on

public works because it helps by creating contracts for firms and provide employment

opportunities, and investment in researches and development to thrive future businesses.

This affects the money supply because depending on the goals to achieve the fed increases

or tighten the money supply.


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WHAT INDICTORS ARE EVIDENT THAT THERE IS TOO

MUCH OR TOO LITTLE MONEY WITHIN THE ECONOMY?

HOW IS MONETARY POLICY AIMING TO ADJUST THIS?

TOOMUCHMONEY

1. CONSUMERSPENDINGINCREASE

2. HIGHERDEMANDFORPRODUCTS

3. SUPPLYOFPRODUCTSDECREASE4. PRICESRISETOOQUICKLY

LITTLEMONEY

1.DECLINEINPURCHASING

2. LOWDEMANDFORPRODUCTS

3. LOWERPRICES

Stimulus programs are very helpful to the economy because they help to improve an economy suffering from weakaggregate demand as well as help reduce the risk and severity of a recession. However, too much money into the

economy could cause inflation. The concept is that if consumers have a lot of extra cash in their pocket they will

be more inclined to buy things. If enough people have extra money demand may exceed supply, and prices will

rise. If there is too much money in the economy, however, people spend more money and demand increases at a

faster rate than supply can match. Prices rise too quickly because of the shortage of products, and inflation results.

By forecasting increases in inflation or slow-downs in the economy, the Fed knows whether to increase or

decrease the supply of money (Obringer,2002).


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ECO 372 Week 4 Presentation (1)

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