Unit 6 Monetary Policy and the Federal Reserve
Unit 6: Monetary and Fiscal Policy
Day 1: Purpose of the Federal Reserve
Federal Reserve Overview
Responsible for monetary policy and money supply management.
Description of the Fed's purpose, role, and functions.
Structure includes the Board of Governors, regional banks, and how they differ from national/state banks.
Key Questions
What is the Federal Reserve (the "Fed")?
What is the "dual mandate" of the Fed?
How does the Fed regulate banks?
How does the Fed safeguard the U.S. financial system?
The Federal Reserve Structure
Location and Structure
Headquartered in Washington, D.C., with 12 regional branches.
Nashville is part of the Atlanta branch.
Regulatory Functions
Pursues twin policy goals:
Low unemployment (around 5%).
Low inflation (around 2% annually).
The Phillips Curve depicts the trade-off between inflation and unemployment.
The Role of the Federal Reserve
Economic Impact
Changes in money supply affect unemployment and inflation:
Expanding the money supply lowers unemployment but raises inflation.
Contracting the money supply increases unemployment but lowers inflation.
Safeguard Functionality
Acts as the lender of last resort, providing liquidity to financial institutions during crises.
Day 2: The Fed’s 3 Major Tools
Monetary Policy Tools
Raising or lowering interest rates (discount rate).
Conducting open market operations (buying/selling government bonds).
Setting reserve requirements (currently 0%).
Governance of the Fed
Board of Governors (7 members, 14-year terms) appointed by the President and confirmed by the Senate.
Federal Open Market Committee (FOMC) comprised of Board members and regional presidents.
Day 3: Monetary Policy Goals
Monetary Policy Definition
Actions by the central bank to manage the money supply.
Goals: increase economic activity while keeping inflation at the target rate of 2%.
Tools of Monetary Policy
Setting reserve requirements.
Lending money to banks (discount rate).
Open market operations (buying/selling bonds).
Effects of Changing Reserve Requirements
Expansionary Policy: Decrease reserve ratio, allowing banks to lend more.
Contractionary Policy: Increase reserve ratio, reducing the money supply and lending ability.
Day 4: Open Market Operations
Understanding Open Market Operations
The Fed buys and sells government bonds to control the money supply.
Buying bonds adds money to the banking system; selling bonds removes money.
Day 5: The Discount Rate
Discount Rate Overview
Interest rate charged by the Fed on loans to banks.
Serves as a foundation for all interest rates in the economy.
Influence on Interest Rates
The discount rate directly influences bank lending rates.
Expansionary monetary policy occurs when the discount rate is low, encouraging spending.
Contractionary policy occurs when the discount rate is high, encouraging saving.
Day 6: Fiscal Policy
Definition of Fiscal vs. Monetary Policy
Fiscal Policy: Government's use of taxation and spending to influence the economy (managed by Congress and the President).
Monetary Policy: Managed by the Fed, focusing on money supply.
Types of Fiscal Policy
Discretionary Fiscal Policy: Legislative actions to influence aggregate demand (e.g., adjusting tax rates).
Non-Discretionary (Automatic Stabilizers): Permanent laws that stabilize the economy automatically (e.g., unemployment benefits).
Strategies for Fiscal Policy
Expansionary Policies: Increase government spending and/or decrease taxes.
Contractionary Policies: Decrease government spending and/or increase taxes.
Review Days
Engagements: Utilize Schoology for lesson checks and Kahoot reviews to reinforce knowledge on monetary and fiscal policy.