Economics Monetary Policy

1. Monetary policy
Monetary: relating to money or currency
Monetary policy is the way the government
controls the supply of money as a way to
influence price stability and bring trust in the
value of the currency.
If the money supply grows too fast, the rate
of inflation will increase; if the growth of the
money supply is slowed too much, then
economic growth may also slow.

2. What is the federal reserve?
§The Federal Reserve, or “The Fed”, is
an independent agency of federal
government that regulates the nation’s
money supply.
§The Fed runs 12 regional banks
around the nation, that regulate the
money supply.

3. Three main objectives of the
fed
§ Maintain full employment
§ Keep prices steady
§ Keep the economy growing

4. How does the federal
reserve control the supply of
money?
Reserve Requirement: the amount of
money banks are required to keep on
hand for consumers.
Discount Rate: the interest rate the Fed
charges if your bank needs to borrow
from the Fed because it doesn’t have the
amount of reserves it is required to have.

5. The reserve requirement
To Slow the Economy:
Fed can increase the amount that must be kept in
reserve which means that there will be less money
for lending or investing.
To Grow the Economy:
The Fed may lower the reserve requirement to
allow banking institutions to loan and invest more
of the deposits. This could bring interest rates
down, encourage more borrowing, and this causes
people to spend more.

6. The Discount Rate
To Grow The Economy:
Raising the discount rate costs banks more to
borrow from the Fed. Consumer interest rates will
change when the discount rate changes. If the
discount rate increases, banks will raise the interest
rates they charge their customers.
To Slow The Economy:
Lowering the discount rates allows lenders to lower
the interest rates they charge their customers. This

7. The Discount Rate
To Grow The Economy:
Raising the discount rate costs banks more to
borrow from the Fed. Consumer interest rates will
change when the discount rate changes. If the
discount rate increases, banks will raise the interest
rates they charge their customers.
To Slow The Economy:
Lowering the discount rates allows lenders to lower
the interest rates they charge their customers. This