Monetary Policy and The Federal Reserve

1
Monetary Policy and The Federal Reserve

• Chapter 15

2
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 .25

3
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 .75)
• Banks do not like to use the windowthe FED is
  the last resort

4
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 3.25 today

5
In Plain English Video

• Take notes
• Focus on the
• Board of Governors (BoG)
• Federal Reserve Banks (RB)
• Federal Open Market Committee (FOMC)

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
• Decrease the RR to increase the money supply
• Increase the RR to decrease the money supply

9
The Money Multiplier

• 1/rr (required reserve)

10
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