1. Monetary Policy Ch19 Notes

2. I. Monetary Policy A. Functions of the “the Fed” 1. To keep the money supply in check so that the economy does not have a depression or run away inflation.

3. B. Tools of the Fed. 1. Raise or lower the Discount Rate.

4. a. Discount Rate is the rate charged to banks when they borrow money from the Fed.

5. B. To help solve inflation 1. The Fed Raises Discount Rate

6. a. This reduces money supply b. Borrowing money becomes harder 1. Demand decreases 2. Prices decrease

7. c. recession- help solve it 1. The Fed lowers Discount Rate

8. a. This increases money supply b. Borrowing money is easier 1. Demand increases 2. Prices increase

9. 2. Buy /Sell Bonds (Open Market Operations) A. To help solve inflation

10. 1. Sell bonds- reduce money supply

11. b. To help solve recession 1. Buy bonds – increase money supply

12. 3. Reserve Requirement a. To help solve inflation

13. 1. Increase reserve requirement – decreases money supply

14. B. To help solve recession 1. Lower reserve requirement – increases money supply

15. II. Types of Policies A. Contractionary Policy (Tight Policy) Decrease demand Decrease Money Supply

16. B. Expansionary Policy (Loose Money) Increase Demand Increase Money Supply

17. C. Who runs the Fed? 1. Board of Governors (7members) 2. Chairman of Federal Reserve

18. a. Appointed by President of U.S. b. Serve for 4- years terms c. Current Chairman: Alan Greenspan