fiscal vs. monetary. fiscal policy 1) taxes and spending -raise taxes, cut spending -cut taxes and...

Fiscal Vs. Monetary

Fiscal Policy

• 1) Taxes and Spending-raise taxes, cut spending-cut taxes and raise spending

Video: In Plain English

• How does the fed work?

• http://www.stlouisfed.org/education_resources/in-plain-english-video/

12 Reserve Banks

Monetary Policy

• 1) Reserve Ratio• 2) Discount Rate• 3) Open Market Operations (BONDS)

The role of the Fed—to take away the “punch bowl” as the party gets going

Reserve Ratio

1) Example-in class-change in fractional reserveVideo http://www.criticalcommons.org/Members/AdrianFohr/clips/beavis-and-butthead-teach-monetary-velocity/view

The Discount Rate• The Discount Rate is the interest rate that the

FED charges commercial banks.• Example:

• If Banks of America needs $10 million, they borrow it from the U.S. Treasury (which the FED controls) but they must pay it bank with 3% interest.

• To increase the Money supply, the FED should ____decrease__ the Discount Rate (Easy Money Policy).

• To decrease the Money supply, the FED should ___increase__ the Discount Rate (Tight Money Policy).

Monetary Operations

• Open Market Operations is when the FED buys or sells government bonds (securities).

• This is the most important and widely used monetary policy

• To increase the Money supply, the FED should __BUY_______ government securities.

• To decrease the Money supply, the FED should ___SELL______ government securities.