1. FEDERAL RESERVE (FED) *** In charge of the nation’s money supply

2. Key Terms 1. interest rates – the percent of money owed on money borrowed 2. easy (loose) money policy – when FED lowers interest (discount) rate to make borrowing and spending easier 3. tight money policy – FED increases interest (discount) rates to make borrowing and spending more difficult 4. monetary policy – using interest rates to control the money supply 5. reserve requirements – the amount of money regular banks are required to keep in the FED bank 6. consumer price index (CPI) – used to measure inflation. Take the average price of 400 everyday items over a period of time. 7. Producer Price Index (PPI) – used to measure the cost of producing products 8. unemployment – you don’t have a job BUT you are actively seeking one 9. full employment – when most everyone looking for a job is able to find one; when unemployment is 4% or less! 10. truth in lending law – when you borrow money, terms of the loan must be disclosed

3. I. Functions of FED A. supply money B. control interest (discount) rates and reserve requirements C. clear checks

4. II. Inflation A. Demand pull inflation 1. increased consumer demand = higher prices B. Cost push inflation 1. higher production costs = higher prices

5. III. Difference between monetary and fiscal policy A. Monetary Policy 1. Milton Friedman 2. controlling interest rates to control the money supply B. Fiscal Policy 1. John Maynard Keynes 2. gov’t taxing and spending used to control the economy