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Federal Reserve Presentation by Team A
Transcript of Federal Reserve Presentation by Team A
How does monetary policy aim to avoid inflation?
How does the discount rate affect the decisions of banks in setting their specific rates?
United States Federal Reserve System
Factors that influence
the Federal Reserve in adjusting the discount rate
The government can control how much money is in circulation by the amount that they print and coin.
The federal reserve system controls the money supply.
Too much money causes inflation or devaluation of the dollar.
Too little money causes deflation.
The #1 way the federal reserve controls the money supply is adjusting interest rates.
High rates discourage barrowing money, which causes less inflation.
The federal reserve can lower interest rates
Lower rates encourage barrowing, which then encourages consumer spending.
As the quantity of money changes, banks are willing to make loans at higher or lower interest rates.
Two different styles of monetary policy
Three tools to control money supply
When the federal fund rate is reduced, the resulting stronger demand for goods and services tends to puch wages and other costs higher, reflecting the greater demand for workers and materials that are necessary for production.
Policy action influence expectations about how that economy will perform in the future including expectancy for wages and these expectations directly influence current inflation.
Short term/ long term rates go down, its cheaper to borrow, so households are more willing to buy goods and services.
Firms are in a better position to purchase items such as property and equipment. Increase in firms profit allows more workers to be hired and boost production.
Demand for money
Changes in real-estate
Changes in credit supply and demand
Change in prime rate affect individuals
Raises credit card rates
Adjustable-rate mortgages may rise or fall with changes of prime rates
Encourages banks to borrow
Increases the money supply
Decrease in rate
Adjusting federal funds rate
Discount rate - federal reserve can adjust interest rates it charges banks for barrowing reserves.
Reserve requirements - federal reserve can adjust the amount of reserves that banks must keep on hand (the reserve ratio).
Open market operations - federal reserve buys and sells U.S. treasury securities. Tools of choice because they are very precise and can be easily implemented.
Increase in the discount rate makes it more expensive for banks to borrow.
Discount rate decrease it is less expensive for banks to borrow.
Stimulus and the money supply
Financing the deficit does not have any offsetting effects.
The government knows what the situation is.
The government know that economy's potential income level.
The government has flexibility in changing spending and taxing.
The size of the government debt does not matter.
Fiscal policy does not negatively affect other government goals.
Why the multiplier model?
Stimulus program - package of economic mearsure put together by the government to stimulate economic growth.
Money multiplier - measure the extent to which the creation of money in the banking system causes growth in the money supply.
Automatic stabilizers - government program or policy that counteracts the business cycle without new government action.
Functional finance - government making spending and taxing decisions based on their effect of the economy.
Terms to know
August 12, 2013
Federal Reserve adjusting the discount rate
Discount rate affect banks and interest rate
Monetary policy aim to avoid inflation
Monetary policy control of money supply
Stimulus program affect money supply
What indictors are evident of to little
or to much money in the economy?
How is monetary policy aiming
to adjust this?
Discourages banks from barrowing funds
Poor economic situation
Higer unemployment levels
Fed raises or lowers short-term loans
Banks may raise or lower interest rate charged to borrowers.
Including prime rates.
Change in prime rates affect whole economy
Increase may result in fewer auto loans.
Fewer auto loans slows down auto industry.
Short term interest rates infuence borrowing costs for firms and households.
Long term interest rates influence corporate bond rates and residential mortgage rates that affect asset prices such as equity prices and foreign exchanges value of the dollar.
Ultimate targets - stable prices, acceptable employment, sustainable growth.
Intermediate targets - consumer confidence, stock prices, interest rate spreads, housing.
Taylor rule - set the federal fund rate at 2% plus current inflation if the economy is at desired output and desired inflation. If output is higher than desired increase the fed fund rate by .5 times the percetage deviation.
Contractionary - occurs when the federal reserve decreses the money supply and raises interest rates
recommended policy to reduce inflation.
Expansionary - when the federal reserve increases money supply and lowers interest rates
recommended policy if we were to encounter a recession.
Stimulus program effect on money supply
In 2009, the U.S. government instituted an $800 billion stimulus pachage.
Allowed for direct spending in education, infrastructure, health, energy, federal tax incentives, and expansion of unemployment benefits and other social welfare provisions.
Objective was to offset the decrease in private spending with an increase in plublic spending in order to save jobs and stop further economic deterioration.
How is the monetary policy aiming to adjust this?
What indictors are evident that there is too much money or to little money within the economy?
Fiscal and monetary policies
Colander, D. C. (2010). Macroeconomics (8th ed.). Boston, MA: McGraw-Hill/Irwin.
FRB: How Does Monetary Policy Aim to Avoid Inflation and Employment. (2013). Retrieved from http://www.federalreserve.gov/faqs/money_12856.htm