Transcript The Monetary System

Fiscal Policy Review - The Payroll
Tax Cut
• http://www.youtube.com/watch?v=yB1DdBP3
FH0
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What does it pay for?
How much do American’s pay?
How much do they pay after the cut?
What is the cap?
What type of fiscal policy?
– Expansionary or contractionary?
– Automatic/mandatory or discretionary?
• What is a potential negative consequence?
Class Auction
• Want to buy this piece of candy?
• What are you willing to trade for it?
• What is required for this trade (barter) to
work?
• What is the solution for this “double
coincidence of wants?”
The Monetary System
EQ: What is money?
What is money? Create a definition.
What is Money?
Money is anything that is accepted
for the repayment of debt and as
payment for goods and services.
http://www.youtube.com/watch?v=TLVoV6gK8mE
Types of Money
Commodity Money
Fiat Money
What type of money does the U.S.
use?
3 Functions of Money
• Use your book to define each and provide
examples to show how each function works:
1. Medium of exchange
2. Unit of account/standard of value
3. Store of value
Functions of Money
• Medium of Exchange
Functions of Money
• Standard of Value
Functions of Money
• Store of Value
Summary
• Draw the 3 functions of money – do not label
the function
• Then with a partner, switch papers and each
partner tries to identify each picture
Review
• What is the definition of money?
• What are the two kinds of money?
– What is the difference between the two?
• What are the three functions of money?
Quick Video
Practice
Characteristics of
Money
It is important that money is ___________
because………………………
Portable
Durable
Divisible
Limited
Practice
Divisibility
Limited
Review
1. What causes inflation?
2. Who is inflation bad for? Who can inflation
help?
3. What is our definition of interest rates?
4. What stage of the business cycle is most
commonly associated with inflation?
5. What stage of the business cycle is most
commonly associated with unemployment?
What is the name of the bank that
manages the U.S. money supply?
• In Plain English Activity
How is money created?
• http://www.youtube.com/watch?v=3HdmA3v
PbSU
Activity
• Create a brochure for the Fed. Be sure to
include the following:
– State the purpose of the Fed and what it is.
– How the Fed is structured.
– What are its regulatory responsibilities?
– What are the three tools of monetary policy?
The FED
• Privately Owned- banks buy stock in the Fed like a
corporation
• Board of Governors- 7 member board appointed by the
Fed. Set policies for the Fed
• Federal Reserve District Banks- Nation is divided into 12
districts. Each district bank runs a district and has a
president and board of directors
FED Chairman
What is monetary policy?
• Actions by the Federal Reserve System to
expand or contract the money supply in order
to influence the macro-economy
• What happens if they over expand the money
supply?
The Federal Reserve System
• The Federal Reserve (Fed) serves as the
nation’s central bank – created 1913.
– oversee the banking system.
– regulates the money supply (monetary policy).
– lender of last resort.
Monetary policy
• Easy Money policies (expansionary) – increase
the money supply and cause economic growth
• Tight Money policies (contractionary) - decrease
the money supply and slow down the economy.
Monetary Policy Tools
1. Federal Open Market Operations Committee
(FOMC)
2. Reserve Requirement
3. Discount Rate
But first… what is a bond?
• http://www.youtube.com/watch?v=5XzlEj2vHQ
• Bond – like an IOU
• Interest – payment for the use of borrowed
money
• Maturity – when the borrowed money needs
to be repaid
What do high interest rates mean
for the economy? Low?
*******FOMC******
• To increase the money supply, the Fed buys
government bonds (securities) from the public.
• To decrease the money supply, the Fed sells
government bonds to the public.
What does an increase in the money
supply do to the interest rates and
price levels? Decrease?
Review
• Scenario – high unemployment and low
growth
1.
2.
3.
4.
5.
6.
Action by FED – easy or tight? Why?
OMO – Buy or sell bonds? Why?
What happens to money supply? Why?
What happens to interest rates? Why?
What happens to investment? Why?
What happens to aggregate demand? Why?
Reserve Requirement
• Reserves are deposits that banks have
received but have not loaned out.
• The reserve requirement is the fraction of
deposits that banks must hold as reserves (set
by the FED).
How is money created out of thin
air?
http://www.youtube.com/watch?v=AgKFLk9xffA
The Fed and the Reserve
Requirement
• What does changing the reserve requirement
from 10% to 20% do the money supply?
Interest rates?
• What does decreasing the reserve
requirement do to the money supply? Interest
rates?
The Discount Rate (no longer used)
• The discount rate is the interest rate the Fed
charges banks for loans.
– Increasing the discount rate decreases the money
supply.
– Decreasing the discount rate increases the money
supply.
What type of monetary policy?
Why?
What type of monetary policy?
Why?
FED REVIEW
• http://www.youtube.com/watch?v=HdZnOQp
4SmU
What are some potential problems
with controlling the money supply?
• The Fed’s control of the money supply is not
precise.
• The Fed must wrestle with two problems that
arise due to fractional-reserve banking.
– The Fed does not control the amount of money
that households choose to hold as deposits in
banks.
– The Fed does not control the amount of money
that bankers choose to lend.
Monetary policy in action
Easy/Expansionary
Policy
Tight/Contractionary
Policy
RR _____
DR _____
OMO – Buy or Sell
MS _____
Excess Reserves _____
Interest rate _____
I_____
AD ______
RR _____
DR _____
OMO – Buy or Sell
MS _____
Excess Reserves _____
Interest rate_____
I_____
AD ______
Monetary policy in action
Easy Money
↓ RR= Banks can loan
more $
Fed Buys OMO’s = bank
have more $ fewer bonds
↓Discount Rate= Fed
lowers cost of borrowing
Tight Money
↑RR = Banks have less $ to
loan out.
Fed Sells OMO’s = banks
have less $ and more
Bonds
↑Discount Rate = Fed
lowers cost of borrowing
Summary
Excess Reserves
Interest Rates
• http://www.frbsf.org/education/activities/chai
rman/
So…. How do monetary policies
affect macroeconomic goals?