Monetary Policy: Federal Reserve Bank of The U.S

Goals of Monetary Policy
Consolidated Balance She

et of the Federal Reserve
Banks
Tools of Monetary Policy
Federal Reserve Purchase
of Bonds
Monetary Policy, Real G
DP, and the Price Level
Monetary Policy and Equ
ilibrium GDP
15 CHAPTER
Monetary
Policy
Effectiveness of Monetary
Policy
Targeting the Federal Fu
nds Rate
Monetary Policy and the FEDERAL RESERVE BANK OF THE U.S.
International Economy
Key Terms
Previous Next
Slide Slide
End
Show
15 - 1
Copyright McGraw-Hill/Irwin, 2002
GOALS OF MONETARY POLICY
Banks
…to assist the
economy in
of Bonds
ilibrium GDP
achieving a
Policy
nds Rate
Monetary Policy and the
full-
Key Terms
employment,
Previous Next
Slide Slide
End
Show
15 - 2
CONSOLIDATED BALANCE SHEET OF
THE FEDERAL RESERVE BANKS
Banks
ASSETS
of Bonds • Securities
ilibrium GDP
• Loans to Commercial Banks
Policy
nds Rate
LIABILITIES
• Reserves of Commercial
Key Terms
Banks
Previous Next
Slide Slide • Treasury Deposits
End
Show
15 - 3
• Federal Reserve Notes
TOOLS OF MONETARY POLICY
Open Market Operations
Banks
Buying Securities
From commercial banks...

of Bonds
ilibrium GDP • Bank gives up securities
Policy
• FED pays bank
• Banks have increased reserves
nds Rate
Key Terms
From individuals...
• Individual gives up securities
Previous
Slide
Next
Slide • Individual deposits check in bank
End
Show
• Banks have increased reserves
15 - 4
FEDERAL RESERVE
Goals of Monetary Policy PURCHASE OF BONDS
New reserves $200
Purchase of a
Banks
Tools of Monetary Policy $800 Required
Federal Reserve Purchase $1000 bond Excess
of Bonds
Reserves reserves
DP, and the Price Level from a bank...
ilibrium GDP
Policy
nds Rate
Key Terms
$1000
$4000 Initial
Bank System Lending Deposit
Previous Next
Slide Slide
End
Show Total Increase in Money Supply ($5000)
15 - 5
Banks
The Reserve Ratio
of Bonds
DP, and the Price Level Raising the Reserve Ratio
• Banks must hold more reserves
ilibrium GDP
• Banks decrease lending

Policy
nds Rate
• Money supply decreases
Key Terms
Lowering the Reserve Ratio
• Banks may hold less reserves
Previous
Slide
Next
Slide • Banks increase lending
End
Show
• Money supply increases
15 - 6
Banks
The Reserve Ratio
of Bonds
The Discount Rate

ilibrium GDP
Policy
Easy Money Policy
nds Rate
• Buy Securities
Key Terms
• Decrease Reserve Ratio
Previous Next
• Lower Discount Rate
Slide Slide
End
Show
15 - 7
Banks
The Reserve Ratio
of Bonds
The Discount Rate

ilibrium GDP
Policy
Easy Money Policy
Tight Money Policy
nds Rate
Key Terms
• Sell Securities
Previous Next
• Increase Reserve Ratio
Slide
End
Slide
• Raise Discount Rate
Show
15 - 8
Banks
The Reserve Ratio
of Bonds
The Discount Rate

ilibrium GDP
Discuss relative
Policy Easy Money Policy
nds Rate
importance
Tight Money Policy
•of each control
Key Terms
Sell Securities
Previous Next
• Increase Reserve Ratio
Slide
End
Slide
• Raise Discount Rate
Show
15 - 9
MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Cause-Effect Chain
Banks
of Bonds
DP, and the Price Level • Money supply impacts interest
ilibrium GDP
Policy
rates
nds Rate • Interest rates affect investment
Key Terms
• Investment is a component of
AD
Previous
Slide
Next
Slide
• Equilibrium GDP is changed
End
Show
15 - 10
MONETARY POLICY AND EQUILIBRIUM GDP
Sm1 S
m2
Goals of Monetary Policy Investment
Real rate of interest, i

et of the Federal Reserve 10 10 Demand
Banks
8 8
of Bonds
DP, and the Price Level 6 6
ilibrium GDP
Dm
Effectiveness of Monetary 0 0
Policy Quantity of money demanded and supplied Amount of investment, i
nds Rate
AS
Money Supply Increases
Key Terms If the money
Interest Rate Decreases
Price level
supply increases
P2
Investment Increases
to stimulate the
Previous Next
Slide Slide P1
AD1 AD2 AD & economy...
GDP Increases
End with slight inflation
Show
15 - 11 Real domestic output, GDP
MONETARY POLICY AND EQUILIBRIUM GDP
Sm1 S S
m2 m3
Goals of Monetary Policy Investment
Real rate of interest, i

et of the Federal Reserve 10 10 Demand
Banks
8 8
of Bonds
DP, and the Price Level 6 6
ilibrium GDP
Dm
Effectiveness of Monetary 0 0
Policy Quantity of money demanded and supplied Amount of investment, i
nds Rate
AS
More Money Supply
Key Terms P3 If theInterest
moneyRates
Lower
Price level
supply increases
More Investment
Previous Next
P2 again…
Slide Slide P1 Still higher AD & GDP
AD1 AD2 AD3
End with significant inflation
Show
15 - 12 Real domestic output, GDP
MONETARY POLICY, REAL GDP
AND THE PRICE LEVEL
Effects of an easy money policy

Banks
of Bonds
Effects of a tight money policy

ilibrium GDP
Policy
nds Rate
Key Terms
Monetary policy & aggregate

Previous Next supply
Slide Slide
End
Show
15 - 13
EFFECTIVENESS OF MONETARY POLICY

Strengths of monetary policy
Banks
• Speed and flexibility
• Isolation from political
of Bonds
pressure
• Successes in the 1980s &

ilibrium GDP
Policy
1990s
nds Rate
Shortcomings and problems

Key Terms
• Less control?
Previous
Slide
Next
Slide • Changes in velocity
End
Show
15 - 14
• Cyclical asymmetry
TARGETING THE FEDERAL
FUNDS RATE
Banks
of Bonds
Generalized Interest
Rate Changes
ilibrium GDP
Policy
nds Rate
Money Supply Impact
The Federal Funds Rate

Key Terms
Previous
Slide
Next
Slide The Prime Interest Rate
End
Show
15 - 15
MONETARY POLICY AND THE
Goals of Monetary Policy INTERNATIONAL ECONOMY
• Net export effect

Banks
of Bonds
• Macro stability and

ilibrium GDP
Policy
the trade balance

nds Rate
Key Terms
• The “Big Picture”

Chapter Conclusions
Previous Next
Slide Slide
End
Show
15 - 16
monetary policy
open-market committee
reserve ratio
discount rate
easy money policy
tight money policy
velocity of money
cyclical asymmetry
Federal funds rate
prime interest rate
Copyright McGraw-Hill/Irwin, 2002 BACK END
Extending the Analysis
Banks
of Aggregate Supply
of Bonds
ilibrium GDP
Policy
nds Rate
Next
Chapter 16
Key Terms
Previous Next
Slide Slide
End
Show
15 - 18

Monetary Policy: Federal Reserve Bank of The U.S

Uploaded by

Copyright:

Available Formats

Monetary Policy: Federal Reserve Bank of The U.S

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Monetary Policy: Federal Reserve Bank of The U.S

Uploaded by

Copyright:

Available Formats

Goals of Monetary Policy

Consolidated Balance She

From commercial banks...

• Banks decrease lending

The Discount Rate

The Discount Rate

The Discount Rate

Real rate of interest, i

Real rate of interest, i

Effects of an easy money policy

Effects of a tight money policy

Monetary policy & aggregate

Goals of Monetary Policy

• Successes in the 1980s &

Shortcomings and problems

The Federal Funds Rate

• Net export effect

• Macro stability and

the trade balance

• The “Big Picture”

You might also like