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Stabilizing the Economy: The Role of the Fed Chapter 14.

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Presentation on theme: "Stabilizing the Economy: The Role of the Fed Chapter 14."— Presentation transcript:

1 Stabilizing the Economy: The Role of the Fed Chapter 14

2 Chapter 14 Learning Objectives. You should be able to: Distinguish between the Federal funds rate and the discount rate. Explain how the Fed influences the interest rate. Show how a demand and supply diagram can be used to model the determination of the Federal Funds rate. Show the effect of expansionary and contractionary monetary policy on the Keynesian cross diagram.

3 Important Distinction Federal Funds Rate -rate of interest banks charge one another for short-term loans. Money is transferred between accounts at the Fed—hence fed funds Discount Rate -rate of interest the Fed charges banks for short-term loans. Originally banks would sell loans to the Fed. The present value would be calculated using the rate of discount.

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5 Most Important Tool of Monetary Policy Open market operations: the purchase or sale of Treasury securities by the Fed Sell Treasury securities: contractionary. Buy Treasury securities: expansionary.

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