1. BANKING & MONETARY POLICY

2. Monetary Policy
Allows central banks to achieve price stability and help maintain economic fluctuations
Determines the size and rate of growth of the money supply
which in turn affects interest rates
Is controlled by the Federal Reserve

3. Objectives of Monetary Policy
Include:
managing inflation
ensuring the general price level in an economy does not change much over time
reducing unemployment
ensuring all who are able and willing to work are employed
boosting economic growth
ensuring an increase in production of goods and services over a period of time
The Federal Reserve seeks an unemployment rate below 6.5 percent, a core inflation rate between 2.0 percent and 2.5 percent and a 2 to 3 percent annual increase in the nation’s gross domestic product for economic growth.

4. Types of Monetary Policy
Includes:
contractionary monetary policy
involves increasing the growth of the money supply and credit to encourage borrowing and spending by consumers and businesses
expansionary monetary policy
involves decreasing the growth of the money supply and credit to discourage borrowing and spending by consumers and businesses

5. Monetary Policy
Includes six major tools used to promote economic stability
reserve requirements
funds rate
discount window
discount rate
open market operations
inflation targeting

6. Reserve Requirements
Are regulations requiring commercial banks to keep a certain percentage of the money customers deposited on reserve each night
this money must be in the bank’s vault or at the closest Federal Reserve bank
May be increased or decreased influencing how much money banks have available for lending
If it were not for reserve requirements, banks could potentially lend 100 percent of the money deposited.

7. Funds Rate
Refers to the interest rate banks charge each other to store their excess cash overnight
by increasing or decreasing the interest rate on reserves, the Federal Reserve influences banks to either hold excess reserves or lend them to consumers and businesses
Impacts all other interest rates
including bank loan rates and mortgage rates

8. Discount Window
Allows eligible institutions to borrow money from the central bank to meet reserve requirements
sometimes banks lend out too much money during the day and must borrow funds overnight to meet the reserve requirements

9. Discount Rate
Refers to the interest rate charged on loans received by banks from the Federal Reserve’s discount window
a decrease in the discount rate indicates expansionary monetary policy while an increase indicates contractionary monetary policy
Is determined individually by each of the Federal Reserve Banks and approved by the Board of Governors of the Federal Reserve System

10. Open Market Operations
Is when the Federal Reserve buys or sells government securities from its member banks in order to increase or reduce the amount of money in the banking system
such as Treasury notes or mortgage-backed securities

11. Open Market Operations
Raises or lowers interest rates
Federal Reserve sells securities to banks to slow inflation and economic growth by raising interest rates
Federal Reserve buys securities to put money into the banking system and stimulate economic growth by lowering interest rates

12. Inflation Targeting
Allows banks to set a specific inflation rate in order to keep inflation low
inflation levels of one to two percent per year are considered acceptable
inflation targets are announced to the public
Has a goals to support long-term growth of the economy by maintaining price stability
It takes six to 18 months before an interest rate change impacts the economy.