Fiscal & Monetary Policy How the Federal Government can Influence the American Economy How the...
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Transcript of Fiscal & Monetary Policy How the Federal Government can Influence the American Economy How the...
Fiscal & Monetary Fiscal & Monetary PolicyPolicy
Fiscal & Monetary Fiscal & Monetary PolicyPolicy
How the Federal Government canHow the Federal Government canInfluence the American EconomyInfluence the American EconomyHow the Federal Government canHow the Federal Government canInfluence the American EconomyInfluence the American Economy
MacroeconomicsMacroeconomicsActions by the government using fiscal policy and monetary policy in an attempt to create and/or maintain steady economic growth
Fiscal Policy: Government spending and tax policies
Monetary Policy: Actions by the Federal Reserve Bank to regulate the nation’s money supply
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To promote economic growth - the government will try to put more money in circulation
To keep the economy from growing too quickly (inflation) - the government will try to pull money out of circulation
Money is any good that is widely accepted in exchange and in the repayment of debts
Functions of Money
Medium of Exchange it is accepted in exchange
for goods and services
Unit of Account Used to express values
(That house is worth $500,000)
Store of Value It maintains value over time(Can use it six month from
now)
The Money SupplyThe Money Supply
M1: Currency, checking accounts and traveler’s checks
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M2: Includes everything in M1 plus . . . savings accounts, money market funds for individuals and Certificates of Deposit (COD’s) under $100,000 — can’t be directly used to make an exchange (purchase)
The Federal Reserve The Federal Reserve SystemSystem
America’s Central Bank
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Federal Reserve Districts
The Federal Reserve Systemwas established in 1913
•The Board of Governors of the Federal Reserve System is the governing body of the Fed. •There are 7 Board members - each serves for 14 years
The U.S. is divided into 12 Federal Reserve districts
•The Federal Open Market Committee (FOMC) is a major policy-making group within the Fed. •This 12-member board controls Open Market Operations - buying and selling government bonds
What does the Fed do?What does the Fed do?Control the money supply
Hold Bank Reserves
Supply the economy with paper money [printed at the Bureau of Engraving in Washington, D.C.]
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Provide check-clearing services
Supervise member banks
Serve as the lender of last-resort for banks having cash management problem
Bank Bank ReservesReserves
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All banks that are members of the Federal Reserve System are required to keep a reserve account at their local Fed bank - similar to a checking account for the bank
Total Reserves - The amount of money in a banks’ reserve account plus the amount it has in its own vault
Total Reserves can be divided into two types: Required and Excess
Bank ReservesBank ReservesRequired reserves - the minimum amount of money [reserves] that a bank must hold against its deposits as mandated by the Fed
Reserve requirement - Regulation set by the Fed that requires a bank to keep a certain percentage of its deposits on-hand [in bank vault or with the Fed
Excess Reserves - Any reserves held that are beyond the amount required by the Fed. Banks can use this money to make loans
By changing the reserve requirement, the Fed can increase or decrease the
money supplyDecreasing the
Reserve Requiremen
tmeans that banks have
more money to lend out
Increasing the
Reserve Requiremen
tmeans that banks haveless money to lend out
Tools of the Tools of the Federal Federal Reserve Reserve
BankBank
•Reserve Requirements
•Open Market Operations
•Discount Rate
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Bank Bank ReservesReservesReserve requirement - Regulation set by
the Fed that requires a bank to keep a certain percentage of its deposits on-hand
By changing the reserve requirement, the Fed can increase or decrease the
money supplyDecreasing the
Reserve Requirementmeans that banks havemore money to lend out
Increasing the
Reserve Requirementmeans that banks haveless money to lend out
Open Market Open Market OperationsOperationsThe Federal Open Market Committee
(FOMC) conducts open market operations by buying and selling government
securities (bonds)Buying securities puts more money in circulation - helping the economy growSelling securities takes money out of circulation - slowing the economy
Goal: Bigger Economy -
Buy Securities
Goal: Smaller Economy -
Sell Securities
The Discount The Discount RateRateThe Discount Rate is the
interest rate the Fed charges a bank for a loan The Federal Funds Rate is the
interest rate that one bank charges another bank for a
loan Banks will borrow money from the least
expensive source
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When banks borrow money from the Fed, the money supply
increasesWhen banks borrow money from each other, there is no change in the overall
money supply
The Discount RateThe Discount Rate
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FederalReserve.jpeg
To increase the money supply, the Fed lowers the discount rate
Banks would be more likely to borrow money from the Fed
To decrease the money supply, the Fed raises the
discount rate
Banks would be less likely to borrow money from the Fed
http://ak4.picdn.net/shutterstock/videos/2315960/preview
/stock-footage-growing-economy-chart-animation.jpg
To promote economic growth - the government will try to put more money in circulation
To keep the economy from growing too quickly (inflation) - the government will try to pull money out of circulation