Monetary Policy

​QUICK REVIEW OF FISCAL POLICY

​FISCAL POLICY

• ​ Fiscal Policy is the use of government spending and taxation to influence & stabilize the economy.

• ​The tools of fiscal policy are TAXES and GOVERNMENT SPENDING.

• ​The PRESIDENT & CONGRESS are responsible for implementing fiscal policies.

Multiple Select

Who is in charge of fiscal policy? (select TWO)

• Congress

• Central Bank

• Residents of a country

• President

Multiple Choice

Which of the following is not a tool of fiscal policy?

• Taxing
• Government Spending

• Interest Rates
• All of these options are tools of fiscal policy.

TWO TYPES OF FISCAL POLICY:

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EXPANSIONARY & CONTRACTIONARY​

Multiple Choice

An example of expansionary fiscal policy would be

• cutting taxes.
• cutting government spending.
• cutting production of consumer goods.
• cutting prices of consumer goods.

Turn to page 18 in the packet.
You will begin with a quick review of fiscal policy before doing today's notes on monetary policy.

​Monetary Policy

​Monetary Policy

​  Monetary Policy- is the use of interest rates and other direct measures to control the money supply and consequently, influence & stabilize the economy.

​The Central Bank (THE FED/Federal Reserve) is responsible for implementing monetary policy.

​

​The 3 Tools of Monetary policy are:

1. ​Interest rates - Percent banks or the FED charge to borrow money.

2. ​Open market operations - Buying & selling bonds

3. Reserve requirement - Percent of $ BANKS MUST KEEP IN VAULTS​

Multiple Choice

Who is in charge of Monetary Policy

• The Government

• Central Bank

• The states

• The Department of the Treasury

Open Ended

What are the 3 tools of Monetary Policy

Match

Match the following tools to their correct definition

• Reserve Requirement

• Interest Rates

• Open Market Operations

% of money banks must keep in VAULTS

% of $ banks/FED charge to borrow money

The FED buying or selling bonds

• % of money banks must keep in VAULTS

• % of $ banks/FED charge to borrow money

• The FED buying or selling bonds

Watch this quick 16 second video to understand what a bond is. ​

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​BEFORE WE MOVE ON

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Open Ended

What is a bond?

Watch this quick 55 second video to understand what interest rates are.

​

​BEFORE WE MOVE ON

​

Open Ended

What are interest rates?

​Easy Money Policy - Used during a recession

​   The goal of Monetary policy is to increase the money supply and fix excess unemployment or RECESSIONS.

The policies include:

​o   Decrease interest rates – When interest rates fall, individuals save less and spend more. They also borrow to make purchases. This increases the money supply.

​

​o   Buy back bonds - When the government (through the central bank) buys back securities (bonds) from the public, the government pays them money, which increases the money supply.

(FED TAKES BOND CERTIFICATE< GIVES $ (cash) in EXCHANGE)​

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​o   Decrease the reserve requirement - All banks are required by law to keep a certain percentage of their deposits as reserves. (MONEY KEPT IN BANK VAULTS) The lower the reserve requirement, the more banks can lend and the greater the money supply.

​Easy Money Policy

​ TO SUMMARIZE:

​

Each time the bank makes a loan we increase the money supply.

​

Lowering interest rates & reserve requirements means banks make more loans.

​

The FED buys back bonds allows regular banks to have MORE money to loan out.

​

MORE MONEY SUPPLY= GROWING ECONOMY (Which is the goal: to fix unemployment and recessions)​

Multiple Choice

Central bank buy bonds to

• increases money supply
• decreases money supply

Multiple Choice

Which of the following scenarios would cause the nation’s money supply to increase?

• Decreasing government spending
• Lowering interest rates
• Raising interest rates
• Selling bonds to investors

Multiple Choice

Monetary Policy is the Central Bank's attempt to...

• control the amount of money in circulation

• control the Federal Government's debt

• control state governments' spending

• none of these answers are correct.

Multiple Choice

An easy money policy means that the Fed is attempting to

• increase the size of the nation's money supply

• decrease the size of the nation's money supply

Open Ended

What is the GOAL of Easy Money policy?

​Tight Money Policy - Used during an expansion

​The goal of Monetary policy is to decrease the money supply and works to fix excess inflation or EXPANSIONS. Three things the fed can do:

​

o   Increase interest rates – When interest rates rise, individuals save more and spend less. They are less likely to borrow, as the cost of borrowing is higher. This reduces the money supply in the economy.

​

o   Sell bonds - When the government (through the central bank) SELLS securities (bonds) to the public in the domestic economy, the buyers pay the government money, which decreases the money supply. (FED GETS $ (money), GIVES BANKS/PUBLIC CERTIFICATES)

​

o   Increase the reserve requirements - The higher the reserve requirement, the less the amount that banks can lend, which will lead to a smaller money supply.

​Tight Money Policy

​ TO SUMMARIZE:

​

Each time the bank DOES NOT make a loan we decrease the money supply.

​

Raising interest rates & reserve requirements means banks will NOT make more loans.

​

The FED selling bonds allows regular banks to have LESS money to loan out.

​

LESS MONEY SUPPLY= SHRINKING ECONOMY (Which is the goal: to stop excess inflation/expansion)​

Multiple Choice

Central bank sells bonds

• increases money supply
• decreases money supply

Multiple Choice

Which of the following scenarios would cause the nation’s money supply to decrease?

• Decreasing government spending
• Lowering interest rates
• Raising interest rates
• Buying bonds to investors

Multiple Choice

A tight money policy means that the Fed is attempting to

• increase the size of the nation's money supply

• decrease the size of the nation's money supply