Banking federal reserve monetary policy
Download
1 / 76

Banking, Federal Reserve, Monetary Policy - PowerPoint PPT Presentation


  • 137 Views
  • Uploaded on

Banking, Federal Reserve, Monetary Policy. Other tidbits . BANKING, MONEY AND THE FED. What is money? Why do we need it? How can we get it? Is there ever enough? Is there ever too much???? What backs the dollar?. Early Banking continued.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Banking, Federal Reserve, Monetary Policy' - jensen


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

Banking money and the fed

BANKING, MONEY AND THE FED

What is money?

Why do we need it?

How can we get it?

Is there ever enough?

Is there ever too much????

What backs the dollar?


Early banking continued
Early Banking continued

  • GOLD STANDARD- 1900 Congress passed the Gold Standard Act- tied to the basic unit of currency and equal to it. Currency could be traded in for gold- people felt secure.

    • Advantage: confidence of people- prevented government from printing too much currency.

    • Disadvantage- economic growth is tied to the money supply – no flexibility for productive growth.

    • Most countries between 1871 and 1914 were on Gold Standard. U.S was last to get on.


Early banking
Early Banking

  • 1933- U.S. government went off the gold standard

  • Britain went of two years earlier.

  • 1934 Gold Reserve Act passed- required citizens to turn in their gold and gold certificates- people were given Federal Reserve Notes in exchange- those who refused to turn in gold had their gold confiscated

  • 1971- President Nixon declared no gold backing whatever for dollar- placed the exchange equivalent with other currencies (dollar v pound v yen v mark) (now in 2008… dollar v pound v Euro) Gold window was closed!

  • And as we know, the dollar will fluctuate with currency market. .Referred to as

    Exchange rate.


What gives money its value
What Gives Money Its Value?

  • Our money today has value because of its general acceptability.


Money vs barter
Money vs. Barter

  • Money - Any good that is widely accepted for purposes of exchange and in the repayment of debt.

  • Barter - Exchanging goods and services for other goods and services without the use of money.


Barter is inefficient and expensive
Barter is inefficient and expensive

  • Deteriorates after few trades

  • Requires a double co-incidence of wants.

  • Too costly to travel long distances(trading a cow for a fuzzy fleece from L.L. Bean in Maine.)


Money supply
MONEY SUPPLY

Key to money is…………do people have faith in it? If not, they rush out and spend it….. No savings!

SO… what do we have today in our economy- high/low savings rate

What has the federal government done lately to increase our spending?

Money supply means- all the money available for spending at any one time.

Fed used to use M1 as barometer. Today, they use M2.



The warm(Revolutionary) left us in debt. Some states were bankrupt. We needed one unified currency ... Hamilton suggested a central bank. The First Bank's charter was drafted in 1791 by the Congress and signed by George Washington. In 1811, Congress voted to abandon


Progression to fed
Progression to FED bankrupt. We needed one unified currency ... Hamilton suggested a central bank. The First Bank's charter was drafted in 1791 by the Congress and signed by George Washington. In 1811, Congress voted to abandon

  • 1812 War with Britain- no money to finance- almost lost- scraped enough at last moment to win – British distracted with Napoleonic Wars.

  • 1815 Second Bank of U.S.

  • 1836 – Andrew Jackson took it down- only wanted State Banks

    Free-for-all began….


Early problems of u s banking system
EARLY PROBLEMS OF U.S. BANKING SYSTEM. bankrupt. We needed one unified currency ... Hamilton suggested a central bank. The First Bank's charter was drafted in 1791 by the Congress and signed by George Washington. In 1811, Congress voted to abandon

  • Before the Fed was established 1913- U.S. could not adjust supplies of money to business activity

  • Banks were often short of cash- if people deposited their money- wanted it on the spot, had legal right to withdraw it.

  • Banks often kept some $ in their reserve accts, and deposited money in other banks.

  • Sometimes demand for currency was >than the amount of money on hand.

  • Banks would draw on deposits from other banks and sell other assets such as government securities.


Banking system problems
banking system problems bankrupt. We needed one unified currency ... Hamilton suggested a central bank. The First Bank's charter was drafted in 1791 by the Congress and signed by George Washington. In 1811, Congress voted to abandon

  • Pressure from depositors often caused a chain reaction of money shortage in a number of banks.

  • People panicked. If bank could not meet its demand for currency- it “failed”

  • Bank closings brought on periods of economic depression called “money panics” (people lost confidence in their bank and wanted their money out)

  • Panic of 1907- Congress decided the U.S. needed acentral banking system where money supply could expand and contract.- Federal Reserve System- 1913


Previous cyclical depressions prior to federal reserve being created
Previous cyclical depressions prior to Federal Reserve being created

1819 – Several years of inflation engineered by the 2nd Bank of the U.S.

1836 – 2nd Bank of U.S. went down after Andrew Jackson did away with central banking. He felt central banking was inherently inflationary.

1857 – depression in northern states and not southern states.. Reflected by state chartered banks requiring state banks to buy state bonds by state govts.

  • 1893 – happened as a result of silver legislation- caused inflated currency- lasted 4 years.

    1907 – Panic… set the stage for Federal Reserve System.


Early banking1
EARLY BANKING created

  • Under what authority can the U.S. Treasury print dollars?

    (Article I, Section 8, clause 5)

  • In early days:

    most banks were state banks – issued their own currency backed by their own supply of either gold or silver

  • Bank of the U.S. – only national bank- acted much like the U.S. Treasury by collecting and paying debts owed to the federal government

  • No regulation of state banks-no limit on amount of currency they could print.

  • Early years- many banks went bankrupt.



So what s the bottom line
So… what’s the bottom line? created

  • Beginning government – attempt at national banking… that failed

  • States wanted to control banking and that failed.

  • Chaos evident with no confidence and market crashes/ depression- banks failed… attempt to re-build national stability

  • For a period of years, banking stability seemed assured.

  • Today,(2010) we have seen that banking took

  • a turn of strong instability.


Additional info on banking legalities
Additional info on Banking….legalities created

Has Congress the power to incorporate a bank? (Yes, “necessary and proper clause”

“to make all laws which shall be necessary and proper for carrying into execution” the expressed powers in the Constitution.”

May a state tax a U.S. Bank?

(No, the power to taxinvolves the power to destroy. Such a tax could be used to destroy an institution vitally necessary to carry out the operations of the federal government, and therefore is unconstitutional and void. McCulloch vs.Maryland (1819)


Banks today
Banks Today! created

  • Community Reinvestment Act (Carter Administration)- required banks to provide loans to low-income families.

  • Continued with no-income families.

  • Banks bundled the risky loans- sold paper- good investment for other banks, financials, global players entered here also.

  • Continued for about 10 years, with banks continuing the risky loans.

  • Hedge fund investors played their cards, and entered the scene.

  • Off to the races!


Bailout begins @ u s government gov
Bailout Begins!@ U.S. Government.gov created

Federal Reserve/Treasury Department have orchestrated the biggest bailout of banks, financials, Fannie and Freddie, AIG, etc. etc. The automobile industry is also in on the act.

  • Fed has pumped billions into system

  • Treasury has trillions extra and

  • 200 billion for Fannie and Freddie


Components of money

M1= Currency coins, demand deposits, travelers checks created

M2=M1+Savings deposits, small time deposits (under $100,000), money market mutual funds.

M3=M1+M2+large denomination time deposits (over $100,000)

LM3 + liquid assets (T-bills,

U.S.Savings bonds, commercial paper)

Near Monies:

Credit cards

Stocks and Bonds

IRA’s

Keogh Accounts

COMPONENTS OF MONEY


Four functions of money
Four functions of money created

  • Medium of exchange

  • Basis for quoting prices

  • Store of value (can accumulate wealth by saving)

  • Standard of deferred payment (buy now, pay later… no payments until 2020) Money will be good to pay in 2020 as is today.


Are credit and debit cards money yes
Are Credit and Debit Cards Money? createdYes!

  • Credit card use represents loans which must be repaid. They represent the use of someone else's money.

  • Debit cards give access to checkable deposits which are already part of the money supply.


Value of money
Value of Money created

  • How much money do you have:

    in your pocket

    in your checking account

    in your savings account

  • Money has value- too much in circulation, decreases its value……. inflation is BAD

  • What backs our currency?

  • Our money is called what?

  • What will a dollar buy today?


Money supply1
MONEY SUPPLY created

Key to money is…………do people have faith in it? If not, they rush out and spend it….. No savings!

SO… what do we have today in our economy- high/low savings rate

What has the federal government done lately to increase our spending?

Money supply means- all the money available for spending at any one time.

Fed used to use M1 as barometer. Today, they use M2.


Supply and demand for credit
Supply and Demand for Credit created

  • Banks and other lending institutions lend money- expect to be paid for its use.

  • Amount they lend (subject to some legal restrictions) is determined by how much they have to lend and how much the borrower is willing to pay.

  • This charge or price for use of money = interest


  • Demand for money
    Demand for Money created

    • Represents the inverse relationship between the quantity demanded of money balances and the price of holding money balances.

    • Interest rate is the price (opportunity cost) of holding money balances.


    Equilibrium in the money market
    Equilibrium in the Money Market created

    • At an interest rate of i1, the money market is in equilibrium: There is neither an excess supply of money nor an excess demand for money


    • Interest rates fluctuate with changes in demand for money in relationship to changes in supply of money available.

    • Money becomes valuable just like other value created for other commodities (demand relative to supply)

    • So when the FED began lowering the FF Rate, and money was almost “free,” did this affect our financial crisis today????


    How did we get fractional banking system
    HOW DID WE GET FRACTIONAL BANKING SYSTEM? in relationship to changes in supply of money available.

    • Goldsmiths: Knights brought back gold when making conquests…what to do with it? – measured it for purity of value

    • Gold treasure more than King could use

    • Receipt was given for deposits- based on purity value

    • People who had gold began to deposit with Goldsmiths- receipts given - receipts exchanged rather than gold and used for purchase.

    • Church entered and said it was fraudulent for Goldsmiths to do this.



    Federal reserve
    Federal Reserve exchange for g/s


    Federal reserve structure
    FEDERAL RESERVE STRUCTURE exchange for g/s

    One of 7 is Chairman

    Board of Governors

    7 Members

    12 District Banks

    Member Banks


    Fed can issue federal reserve notes
    FED Can Issue Federal Reserve Notes………………. exchange for g/s

    Have you ever seen a Federal Reserve Note?

    Do any of you have any Federal Reserve Notes?

    A=Boston

    B= New York

    C= Philadelphia

    D= Cleveland

    E= Richmond, VA

    F= Atlanta

    G= Chicago

    H= St. Louis

    I= Minneapolis

    J= Kansas City

    K= Dallas

    L= San Francisco


    12 Regional Banks exchange for g/s

    1. A.Boston

    2. B. NY

    3.C. Philadelphia

    4.D. Cleveland

    5.E. Richmond,VA

    6.F. Atlanta

    7. G. Chicago

    8.H. St. Louis

    9. I. Minneapolis

    10. J. Kansas City

    11. K. Dallas*

    12.L. San Francisco


    12 District Banks. exchange for g/s

    Dallas is the 11th District… K

    http://www.dallasfed.org/

    25 Regional Banks.

    Dallas has region banks in El Paso, San Antonio, Houston.


    Is the fed effective
    Is the Fed effective???--------- exchange for g/s

    What is the Discount Rate today 6/27/12 .75

    8/8/11 .75

    11/2/10 .75

    4/22/10 .75

    4/20/09 .50

    11/17/08 1.25%

    4/15/08 2.50

    4/16/07 6.25%

    6/29/06 6.00%

    4/17/06 5.75%

    11/21/05 5.00%

    Spring, 2005 3.75%

    Dec. 2004, 3.00%


    What is the exchange for g/sFederal Funds Rate –Today 6/24/12 .25

    8/8/11 .25

    11/2/10 .25

    422/10 .25

    4/20/09 .25

    11/17/08 1.00%

    4/15/08 2.25 %

    4/16/07 5.25%

    6/29/06 5.18%

    4/17/06, 5.00%

    11/21/05, 4.15%

    Was 2.875%(spring, 2005)

    (was 2% 12/2004)

    (2003, FFR was 1.0%)


    Prime Rate? – Today – exchange for g/s6/24/123.25

    8/8/11 3.25

    11/2/10 3.25

    4/22/10 3.25% 4/20/09 3.25%

    11/17/08 4.00%

    5/15/08 5.25%

    4/16/07 8.25%

    6/29/06, 8.00%

    4/17/06, 7.75%,

    11/21, 7.00%

    (was 5.75% in spring 2005)

    (was 5.00 12/2004)?

    Where does fiscal policy enter in here?

    What would constitute a counter cyclical move by either the Federal government or the Federal Reserve?


    3 monetary tools for the fed
    3 Monetary Tools for the FED exchange for g/s

    • Reserve Requirement

    • Discount Rate

    • FOMC


    One tool to control money supply reserve requirement
    One Tool to Control Money Supply exchange for g/s Reserve Requirement

    • The Fed requires banking institutions, including S&Ls, Credit Unions, Loan Assns, to maintain reserves against the demand deposits of their customers. Required and excess are important concepts

    • Required Reserves are: vault cash and deposits held for them at the Fed.

    • This RR can alter the loans that members can make by:

    • Lowering RR = creating more money to loan

    • Raising the RR= decreasing money creation.

      RR’s do not change very often.

      Changes in RR can be disruptive of banking operations. RR change could force banks to sell securities quickly or call in loans to meet the Fed requirement.

      Current: 3% 0-$46.5 Mil

      10% $46.5 +


    How fractional banking works fed rr is 20 bank required to hold a percentage of its deposits on rr
    How Fractional Banking Works exchange for g/sFed RR is 20%(bank required to hold a percentage of its deposits on RR

    Deposit made = $100,000

    -20,000 (bank holds in reserve

    $ 80,000 (bank can loan this amount)

    This $80,000 is considered new money

    Whoever receives the $80,000 as a loan then deposits it into an account and can write checks immediately, but the bank views it as “never seen before.”


    Continued rr fractional banking example
    CONTINUED RR/FRACTIONAL BANKING EXAMPLE exchange for g/s

    $80,000

    -16,000 (20% reserve required)

    $64,000 (potential new loan which can be created and loaned out to another customer

    $64,000 new deposit in mind of bank

    - 12,800 (20 % must be kept in reserve)

    $51,200 considered new money available for loan


    Continued rr fractional example
    CONTINUED RR/FRACTIONAL EXAMPLE exchange for g/s

    This cycle keeps going on and on-

    The money multiplier factor for 20% RR is 5 to 1

    Using the above example- banks could create 5 times the $100,000 at 20% reserve required or in other words, it can create $500,00 “NEW MONEY”

    At 25% required as opposed to say 10%- higher requirement would lower the multiplier effect from 10 to 4 which in turn would not allow banks to have as much money to loan- or would be taking money out of circulation.


    Summary rr fractional banking multiplier
    Summary/RR/Fractional Banking/Multiplier exchange for g/s

    • The higher the required reserve- the lower the multiplier.

    • The potential deposit expansion multiplier is merely the reciprocal of the required reserve ratio (r ) In case of 20% example or l/5 of total deposits to be held- deposit expansion multiplier is 5

    • If 10% was to be held- deposit expansion multiplier is 10.


    Money multiplier
    Money Multiplier exchange for g/s

    Potential and Actual:

    Potential = 1 required reserve

    Actual (will be much smaller than potential) a. currency drain (in pockets) b. Excess reserves (held in banks)


    Does multiplier always work no
    DOES MULTIPLIER ALWAYS WORK? no exchange for g/s

    • Creating New Money with the deposit expansion multiplier effect will not work if:

    • All excess reserves are tied up. (purchase securities, loans, etc.)

    • Ifperson receiving the loan decides to hold currency rather than deposit it into the bank

    • If banks decide not to extend loans even though they have excess reserves available (referred in the early 90’s as “credit crunch.” And… is happening today!


    Banking change 1993 sweet accounts
    Banking Change 1993 exchange for g/sSweet Accounts

    Banks are in business to make money!!!When they get greedy- they often fail as we have seen

    To get around the RR requirement- Banks got creative

    Transfer from savings to deposit accounts if accounts were negative

    Transfer out of deposit to savings if too much not “earning interest”

    Reducing the amount in deposit accounts can lower % required for RR.


    Second tool to control money supply discount rate
    SECOND TOOL TO CONTROL MONEY SUPPLY- DISCOUNT RATE exchange for g/s

    • There are two types of interest: Simple and discount.

      • Simple- paid each time a payment is made on the loan.

      • Discount- entire amount of interest owed is deducted from loan before it is issued


    Discount rate continued
    Discount Rate Continued exchange for g/s

    -Member banks “lent out” (have no money to loan and a good corporate customer wants a loan)

    - Or, perhaps they can’t cover their required reserve requirement.

    - Need to pay out customer request for deposited funds and poor management of prior loans left bank short of cash


    Discount rate continued1
    DISCOUNT RATE CONTINUED exchange for g/s

    • District Bank is not a charity bank… charges interest on money loaned to member banks.

      • If Member Bank borrows $100,000 at 10%

      • The interest is discounted up-front- Member has $90,000 to take back to loan.

      • Member bank is not going to loan at 10%

      • Adds 2 to 3 points to constitute prime rate. In this example is 13%


    Discount rate continued2
    Discount Rate continued exchange for g/s

    • If ordinary citizen wants to borrow, points added to prime depending on type of loan, collateral, history, etc.

    • Prime rate is always higher than discount- each bank sets own prime, but large banks tend to all have the same.

    • Prime is rate given to best corporate customers.


    Discount rate continued3
    DISCOUNT RATE CONTINUED exchange for g/s

    • If Fed wants to cut down on bank loans, they can raise the discount rate.

    • Recently the Fed lowered the discount rate to encourage loans

    • **Banks will borrow from Federal Funds Rate before going to the Fed to borrow. Too many trips to the Fed to borrow signals poor fiscal management of the bank

    • What is the Federal Funds Rate? The rate banks can charge (as set by the BOG) for short-term loans between each other – often overnight.

    • Federal Funds rate will be lower than discount rate. Why?

    • 1.25 vs 1.00 (11/24/08) Today: .50% vs .25%


    On may 17 2002 fed revised discount program
    ON May 17, 2002- Fed revised Discount program exchange for g/s

    • Type of discount would be called Primary Credit.

    • Available for very short term back-up source of liquidity to depository institutions in sound financial condition.

    • Would be extended at a rate above the “usual” level of short-term federal funds rate.

    • Interest rate on primary credit would be 100 basis points above targeted federal funds rate.

    • If FF rate is .5 the primary credit would be 1.5

    • This encourages banks to borrow from each other rather than going to Fed. Allows Fed to eliminate a lot of bank investigations and paperwork.

    • Also establishing a secondary credit = another 50 basis points to financial depositories not quite as sound.

    NOT!!!!!!!!!!


    Third tool to control open market committee fomc
    THIRD TOOL exchange for g/s TO CONTROL OPEN MARKET COMMITTEE (FOMC)

    • This is the most common tool used by Fed to alter the money supply.

    • Buying and Selling of U.S. securities on the open market

    • FOMC meets about every six weeks.

    • FOMC = all 7 BOG, 12 District Presidents

    • N.Y. President permanent member, other 11 Presidents rotate on the voting 12 on yearly basis.

    • FOMC constitutes 12 persons.

    • Can directly influence the money supply in a non-disruptive way.


    Fomc continued
    FOMC Continued exchange for g/s

    • FED can write a check without funds in an account so to speak.

    • FED holds large portfolio of U.S. government securities

    • FED engages in open market trading with approximately 3 dozen major securities dealers.

    • These transactions take place at NY Fed Trading Desk

      A SELL OPERATION

    • When Fed wishes to restrain money supply growth, the Fed sells U.S. government securities on the open market.


    Fomc continued1
    FOMC Continued exchange for g/s

    • Call goes out from NY Desk to pre-selected security dealers. Go out to the banks with the offer.

    • Securities dealers then pay the Fed from deposits held at their banks, and the Fed simply deducts an equivalent amount from the banks’ reserve account.

    • As result- banks have less credit in reserve-(taken from excess reserves) and cannot make as many loans

    • Banks might even have to sell some of their investments… reduced supply of credit throughout the banking system.


    • FED controls this operation by enticing banks to buy government securities by offering “good deals.”

    • Example: Treasury Bond issued to FED.$10,000.FED offers this Bond interest to pay a fixed rate of 10% yearly until bond expires.- Fed (through Security dealer) goes to bank and says (sell this $10,000 bond for $8,000 – still pay the 10%- (this is selling below par)

    • This pulls lump sum out of circulation (actual rate bank will make over bond life is 12l/2 % . Money supply has shrunk.

      If the banks elect to buy- less money to loan.

      Banks prefer buy government securitiesbecause of the risk factor being lowered.


    Fomc continued2
    FOMC CONTINUED government securities by offering “good deals.”

    BUY OPERATION:

    • When FED wants to increase the money supply, it reverses the procedure and purchases U.S. government securities on the open market. It then credits the reserve accounts of the banks in which securities dealers keep their deposits. End result is that banks have more funds to lend.

    • Example: Fed offers to buy the $10,000 bond sold on open market for $12,000. Bank sells- this puts money incirculation or creates potential for banks to loan more to member banks.


    Fomc continued3
    FOMC CONTINUED government securities by offering “good deals.”

    • Open Market is not in the business to make money- they actually lose money on most transactions

    • Main function is to control loans the banks can make.

    • Securities desk in N.Y. puts the bonds for buy or sell out to Security dealers for best bid.

    • Every security purchased lowers the money supply.

    • FED can use this tool as major way to offset cyclical economic swings. Can also supply money for seasonal adjustment demands made by business and consumers. Or, as we saw, provide money when disaster strikes.




    Part iii
    PART III government securities by offering “good deals.”

    FEDERAL RESERVE AND MONETARY POLICY


    Fed as the nation s central bank
    FED AS THE NATION’S CENTRAL BANK government securities by offering “good deals.”

    MONETARY POLICY AS REQUIRED BY Congress

    • Provide a flow of credit and money that will foster economic stability and growth

    • Establish a high level of employment

    • Provide stability in purchasing power of the dollar.

    • Reminder- Fed is autonomous

      Three principal tools to implement monetary policy:

    • Reserve requirements

    • Discount rate

    • Open market operations


    Money and production
    Money and Production government securities by offering “good deals.”

    • Money is the means of helping to facilitate our economic purposes of production, distribution, and consumption of goods and services

    • Relationship between money supply, price levels and business is important aspect of macro theory.

    • Equation of Exchange: MV=PT or MV=PQ

      Money x Velocity = Prices x Business Transactions (real levels of output)

      MV= total spending for the year (velocity is # times $ turns over in a year )

      PQ= total business for that year.

      If any of these get out of balance- economy out of sync.


    Equation of exchange
    Equation of Exchange government securities by offering “good deals.”

    • M x V ≡ P x Q

    where:

    M represents Money Supply

    V represents Velocity*

    ≡ means must be equal to

    P represents Price

    Q represents Real GDP

    *The average number of times a dollar is spent to buy final goods and services in a year


    Demand for money what is so magical about the store of value
    Demand for Money government securities by offering “good deals.”What is so magical about the $$$$Store of Value

    • Need for transactions

    • Emergencies/ safeguards

    • Rather hold $ than other assets- equity plus

    • Assume stability of the dollar or all bets off.


    How monetary policy can affect international trade
    HOW MONETARY POLICY CAN AFFECT INTERNATIONAL TRADE government securities by offering “good deals.”

    Contractionary Monetary Policy

    (decrease the growth in money supply

    Increase in interest rates

    Encourages foreign financial investors in U.S.

    Strengthens the international value of dollar

    Increases imports

    Decrease exports

    Employment may decrease

    Inflation may decrease

    Expansionary Monetary Policy

    (increases rate of growth in money supply)

    Decreases interest rates

    Discourages foreign financial investment in the U.S.

    Weakens the international value of the dollar

    Decreases imports

    Increases exports

    Employment may increase..Inflation may increase


    U s has a stop go monetary policy
    U.S. has a Stop/Go Monetary Policy government securities by offering “good deals.”

    Expansion

    Contraction

    S1

    S

    S

    S1

    Interest

    rate

    Interest

    rate

    D

    D

    Quantity of money

    Quantity of money


    Fed in action
    FED IN ACTION government securities by offering “good deals.”

    Fed wants to affect Consumption and Investment by adjusting the monetary policy.

    Invese relationship between price of existing bonds and rate of interest

    Interest rate Bond value

    Today…. Interest rate ? Bond value ?


    Figure 16 4 determining the price of bonds panel a
    Figure 16-4 government securities by offering “good deals.” Determining the Price of Bonds, Panel (a)

    Contractionary Policy

    • Fed sells bonds

    • Supply of bonds increases

    • Bond prices fall


    Figure 16 4 determining the price of bonds panel b
    Figure 16-4 government securities by offering “good deals.”Determining the Price of Bonds, Panel (b)

    Expansionary Policy

    • Fed buys bonds

    • Supply of bonds falls

    • Bond prices rise


    Big picture for fed
    BIG PICTURE FOR FED government securities by offering “good deals.”

    • To forestall depressions in period of prosperity

    • To stimulate the economy in period of declining economic activity.

    • I.E. To smooth out the swings of the business cycle… uses counter-cyclical moves


    STAY TUNED... FED IS WORKING IT'S MAGIC AS WE SPEAK! government securities by offering “good deals.”


    So are you better off
    So, are you better off? government securities by offering “good deals.”

    Or is the federal government the Grinch?


    Kiley puts all her excess bones in the bank
    Kiley government securities by offering “good deals.” puts all her excess bones in the bank!


    ad