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Published byPreston Patterson Modified over 7 years ago
Do you know anyone who is paying a mortgage off? How many people in this class want to own a home?
Monetary Policy A Definition: The actions the Federal Reserve takes to influence the level of real GDP and the rate of inflation. It tames the business cycles, it controls interest rates and the money supply through the use of Easy and Tight money policies.
3 Tools of Monetary Policy 1. Discount Rate: The interest rate that an eligible member bank is charged. Money creation: If interest rates are high the less there is. If interest rates are low the more there is.
Continued… Part 2 2. Reserve Ratio: The portion of depositors' balances banks must have on hand as cash. Example: So, if a bank has Deposits of $1 billion, it is required to have $100 million on reserve 0r 10%.
Continued… 3. Open Market operation or Bonds: Selling bonds inject money into the FED banks. Buying bonds put money back into the economy.
Easy & Tight Money Policies Important Points: 2. Easy Money Policy: Lowers the interest rates. Increases the money supply. Encourages investment spending. Buying back bonds increases the supply of money. Reserve Ratio decreases.
Some Problems with the Easy Money policy. The problems… Over borrowing Over investment
Money Policies continued… Important points: 2. Tight Money Policy Hikes up the interest rates Reduces the money supply Bonds are sold to decrease the money supply Reserve Ratio increases
The problems with the Tight Money policy The Problems… Investment spending declines. Lowers the real GDP (Gross Domestic Product.) Layoffs and cut backs follow
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