Finish Your Monetary Policy Drawings

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After loaning the government $$$

• You are left holding a bond.

• If it’s a 10 year bond, you’ll get paid interest each year.

• And receive the “purchase amount” back in 10 years.

OR...

• Maybe you don’t want to wait 10 years.

• Something comes up, and you want your cash now!

• In that case you could sell that bond to someone else.

How the Fed controls the money supply...

(drum roll)

The Fed buys or sells bonds in the open market

• The Fed can print money, and BUY bonds from the public.

• This INCREASES the money supply.• Which makes interest rates go ___• which makes people/businesses borrow MORE• AND spend MORE (C & I go up)• so AD increases, and Real GDP increases• and recession ends (yay!!)

Think of a dam…

• A dam controls the flow of water downriver.

• Releasing too much water would cause flooding.

• Too little water would cause a drought.

The Fed is like a dam...

• & the river is the $ supply.

• Too much $ causes inflation.

• Too little $ causes a recession.

Federal Reserve

Money Supply

So, to fight inflation, the Fed should...

• Sell bonds.

• Which will shrink the money supply,

• and make dollars more valuable.

Relationship between unemployment, inflation, and

Real GDP.

Quiz

1. Population = 100Employed = 30

Not employed but looking = 20What is the unemployment rate?

• A) 10%• B) 20%• C) 30%• D) 40%

2. A gulfstream employee gets laid off because of the recession. What type of

unemployment is this?

• A) Structural

• B) Cyclical

• C) Frictional

• D) Seasonal

3. You are fired from your job because your boss doesn’t like you. What kind of

unemployment is this?

• A) Structural

• B) Cyclical

• C) Frictional

• D) Seasonal

4. A CD store goes out of business as more people buy music online. What kind of unemployment do the store

employees have?

• A) Structural

• B) Cyclical

• C) Frictional

• D) Seasonal

5. When a period of steady work is followed by a period of unemployment

each year.

• A) Structural unemployment

• B) Cyclical unemployment

• C) Frictional unemployment

• D) Seasonal unemployment

6. When the skills of workers don’t match the jobs available.

• A) Structural unemployment

• B) Cyclical unemployment

• C) Frictional unemployment

• D) Seasonal unemployment

7. When the Fed sells bonds, the money supply…

• A) increases

• B) shrinks

8. When the Fed sells bonds, interest rates…

• A) rise

• B) fall

9. The Fed is most likely to lower interest rates…

• A) when we are in a recession.

• B) when inflation is high.

10. The Fed is most likely to sell bonds…

• A) when we are in a recession.

• B) when inflation is high.

Federal Reserve (the “Fed”) Structure and Functions

What are banks good for?

• What services do banks provide??

• Banks:

• hold our money

• lend us money

• process check and debit card transactions

The Federal Reserve or “Fed”

• IS A “BANK FOR BANKS”.

• The Fed– holds money for banks (and the government)– lends money to banks (and the government)– processes transactions between banks– monitors bank reserves

• percent of deposits banks must hold

• currently 10% of all deposits

The Fed’s Structure

• Privately owned, publicly run.

• Banks own it– they buy stock in it

• The president appoints the Board of Governors

• Governors serve staggered 14-year terms.

• One of the governors is made “Chairman of the Fed”.

Federal Reserve Bank – Atlanta District

Strong-Like-Bull Rule

• If Real GDP is in a lull, Bu.L.L.

• (Buy bonds, Lower federal funds rate, Lower discount rate)

Federal Open Market Committee

• (part of the Federal Reserve)

• Controls MONETARY POLICY– interest rates– the money supply

• the Fed prints our money

• & controls it’s circulation

Monetary Policy Handout

Check-Clearing Simulation

Board of Governors Simulation

2010

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World’s most powerful people 2010.

(according to Forbes)

Ben Bernanke

• Chairman of the Fed, June ‘05-Today

• 60 Minutes Video

1. Who owns the Fed?

• A) citizens

• B) banks

• C) the government

2. Who runs the Fed?

• A) the President

• B) Congress

• C) The Board of Governors

3. Who appoints the Board of Governors?

• A) The President

• B) Member Banks

• C) The Chairman of the Fed

• D) Citizens by Vote

4. The Fed is short for the

• A) Federal Reserve

• B) Federal Government

• C) Federal Bureau of Investigation

5. Which part of the Fed controls monetary policy?

• A) The Chairman of the Fed

• B) The Federal Open Market Committee

• C) The Board of Governors

• D) The Member Banks

6. What does monetary policy involve?

• A) taxes and spending

• B) money supply and interest rates

• C) A & B

• D) taxes and interest rates

• E) spending and money supply

7. The Federal Reserve

• A) holds money for banks

• B) lends money to banks

• C) processes transactions between banks

• D) lends money to the government

• E) all of the above

End