Monetary Policy and the Federal Reserve

low unemployment

A primary goal of the Federal Reserve regarding employment

Stable prices

A primary goal of the Federal Reserve aimed at maintaining low inflation.

12

How many regional banks are there that accept deposits and make loans to member banks?

Monetary Policy

Control of money supply and credit conditions to influence macroeconomic activity like inflation, unemployment and economic growth.

Reserve Requirement

The amount of money banks must hold in reserve, either in their vault or on deposit with the Fed.

Discount Rate

The interest rate the Fed charges member banks for loans taken directly from the Fed.

Open Market Operations

The buying and selling of government securities (bonds) on the open market.

Easy Money Policy

A monetary policy approach where the Fed buys government securities to increase the money supply.

Tight Money Policy

A monetary policy approach implemented during high inflation when the economy is considered 'too hot'.

Policy implementation lags

Challenges in monetary policy where it takes time for policies to affect the economy.

Political pressure

A challenge faced by the Federal Reserve while attempting to apply monetary policy.

Basic functions of the Fed

1) Regulating the Money Supply

2) Clearing checks

3) Advising gov on fiscal policies

4) Holding reserves (BIG ONE)

5) Supervising banks (BIG ONE)

Loose/Expansionary Policy

Makes credit inexpensive and abundant. Might lead to inflation

Loose Policy Points

• Borrowing is easy

• Consumers buy more

• Businesses expand

• More people are employed

• People spend more

Tight/Contractionary Policy

Makes credit more expensive and in short supply in an effort to reduce inflation

Tight Policy Points

• Borrowing is difficult

• Consumers buy less

• Businesses postpone expansion

• Unemployment increases

• Production in reduced

Loose policy encourages _______ while tight policy controls ______

Growth, inflation