Unit 4: Money 3/10/9

The Federal Reserve is the personal bank of the government and is the central bank of the Unite States. It controls money supply, the reserve requirement, and member and distric banks.
 The Federal Reserve is the entity that controls monetary policy. They have 4 tools to work with

1. Open Market Operations (buying and selling of bonds)
2. Discount Rate (the interest rate that the Fed charges banks)
3. Reserve Requirement
4. Federal Fund Rate (the rate banks charge other banks for short term loans.

The Fed can employ two policies when using these tools, expansionary to fight a recession, or contractionary to fight inflation.

Under Expansionary Policies, The Fed wants to increase Money Supply, which will increase Ad and decrease interest rate,

To do so, they could 

• Buy bonds
• Lower Reserve, Discount, and Federal Funds Rate

Under Contractionary policy, The Fed want to decrease Money Supply, which will decrease AD and increase interest rates

To do so, they could

• Sell bonds
• Increase Reserve, Discount, and Federal Funds Rate.

Fiscal Policy Vs. Monetary Policy

The government is responsible for Fiscal Policy and the Fed is responsible for Monetary Policy

Expansionary Monetary Policy increases money supply which increase AD and lowers interest rate

Contractionary does the opposite

Expansionary FISCAL Policy increases AD through increasing Government Spending and lowering taxes, this creates a deficit and increases the interest rate. This also lower exports and import because this causes the dollar to appreciate 

Contractionary does the opposite