Summary of Monetary Policy and the Federal Reserve

Monetary Policy Overview

• Definition: Control of money supply and interest rates to achieve macroeconomic goals.
• Conducted by the Federal Reserve ("the Fed").

Federal Reserve Structure

• Established in 1913, headquartered in DC with 12 district banks.
• Goals: Dual mandate - price stability & maximum sustainable employment.
• Federal Open Market Committee (FOMC): Meets 8 times a year to set interest rates and assess economic indicators.

Monetary Policy Tools

• Sets interest rate on reserves.
• Sets overnight reverse repurchase agreement rates.
• Adjusts the discount rate.
• Engages in open-market operations to influence money supply.

Fractional Reserve Banking

• Banks can borrow reserves from the Fed or other banks if needed.
• Excess reserves can be loaned out or earn interest with the Fed.

Interest Rate Significance

• Increase in the Federal Funds Rate (FFR) leads to higher rates throughout the economy, affecting borrowing and saving.
• Higher rates generally decrease investment and consumer spending, shifting Aggregate Demand (AD).

Monetary Policy Types

• Expansionary: Decreases interest rates, stimulates spending, shifts AD right.
• Contractionary: Increases interest rates, reduces spending, shifts AD left.