1. Monetary Policy and The Federal Reserve
Chapter 15

2. In Plain English Video Take notes Focus on the
Board of Governors (BoG)
Federal Reserve Banks (RB)
Federal Open Market Committee (FOMC)

3. Fed Funds Rate
FDIC member banks loan each other overnight funds in order to balance deposit accounts each day.
The ir they use to loan each other is the FFR.
Currently at .5%

4. Discount Rate
FDIC banks may borrow short term loans directly from the FED
This is the discount window and is set above the FFR (currently 1.0%)
Banks do not like to use the window—the FED is the “last resort”

5. Prime Rate ir that banks charge their most “credit worthy” borrowers
Historically, the Prime Rate has been 3% higher than the FFR
So it is 3.5% today

6. Easy Money Policy (expansionary)
The Fed wants the money supply to grow
Lower all interest rates = people will borrow more
SEE GRAPH -- DOCUMENT CAMERA

7. Tight Money Policy (contractionary)
The Fed wants to get money out of the system
Increase all interest rates = people borrow less
Why take money out?
INFLATION
SEE GRAPH -- DOCUMENT CAMERA

8. Required Reserve
The amount of money the Fed requires each bank to hold (amount they are not allowed to loan)
Currently at 10%

9. Excess Reserve
The amount of money the bank can loan

10. The Money Multiplier
1/rr (required reserve)

11. Reserve Multiplier example
Assume Bank A receives a deposit of $1,000. Bank A has a required reserve (rr) of 10%.
They must put $100 in the vault but can lend out $900.
Someone borrows the $900, uses it and it ends up in Bank B.
Bank B must now put $90 in the vault but can lend out $810 to a new person