Fiscal Vs. Monetary

Fiscal Policy 1) Taxes and Spending -raise taxes, cut spending -cut taxes and raise spending

Video: In Plain English How does the fed work? es/in-plain-english-video/

12 Reserve Banks

Monetary Policy 1) Reserve Ratio 2) Discount Rate 3) Open Market Operations (BONDS)

The role of the Fed—to take away the “punch bowl” as the party gets going

Reserve Ratio 1) Example-in class-change in fractional reserve Video anFohr/clips/beavis-and-butthead-teach- monetary-velocity/view

The Discount Rate The Discount Rate is the interest rate that the FED charges commercial banks. Example: If Banks of America needs $10 million, they borrow it from the U.S. Treasury (which the FED controls) but they must pay it bank with 3% interest. To increase the Money supply, the FED should ____decrease__ the Discount Rate (Easy Money Policy). To decrease the Money supply, the FED should ___increase__ the Discount Rate (Tight Money Policy).

Monetary Operations Open Market Operations is when the FED buys or sells government bonds (securities). This is the most important and widely used monetary policy To increase the Money supply, the FED should __BUY_______ government securities. To decrease the Money supply, the FED should ___SELL______ government securities.