Monetary Policy Alan Greenspan: Was The 2 nd most powerful Person in the US. the “ Fed ”

GOALS OF MONETARY POLICY … to assist the economy in achieving a full employment , noninflationary level of output Ben Bernanke : The New Man in charge at the Fed: Took over January 2006. Scored 1590 on SAT

The Federal Reserve - 1913

The FOMC Meeting Room in Washington DC The FOMC meets around a 27-foot oval mahogany table in a room with a 23-foot ceiling with a 1,000-pound chandelier .

New reserves $800 Excess Reserves $ 4000 Money created thru Bank Lending Mischa Barton Deposits $1,000 In Her Bank [ RR is 20 % ] $ 200 RR $ 1000 Initial Deposit TMS is $ 5,000 Mischa from the O.C. [member of the public] Mischa Barton’s

New reserves $1,000 Excess Reserves $ 5,000 New money Created thru lending Fed buys a $ 1,000 Bond from Mischa’s Bank TMS is $5000 20% RR Fed Mischa Barton’s

The Fed’s 25 Branches

Functions of the Fed Refund Check Destroy/Issue paper notes

4. Several Thousand Member Banks

Recent GDP

“ When the party gets too good, it’s the job of the Fed to take away the punch bowl.” The Fed’s policy is “If you see inflation, its too late. Whip it before it gets out of the box.” During a recession, the Fed is happy to “spike the punch.”

If The Economy Is Exceeding The FE GDP Speed Limit Of 4% -

Beating the Inflation Dragon

See if you can understand some “GREEN-SPEAK”

“ For Richer or For Poorer ” For Andrea, it took 12 years to get a marriage proposal she could understand. [She got 3, but didn’t understand what he was saying]

G reenspan S worn in for a 5 th 4 -year T erm

Y R Real GDP D M Investment Demand Reall Interest Rate 10 8 6 0 Money Market QID1 “ Easy Money” During Recessions MS 1 AS AD 1 P 1 10 8 6 0 MS 2 P 2 Price level Buy If there is RECESSION MS will be increased. QID2 D I Y* “ Easy Money” – (Buy/Sell) bonds, which (increase/decrease) MS, which (increase/decrease) interest rates, which (appreciate/depreciate) the dollar, which (increase/decrease) C, Ig, & Xn, which (increase/decrease ) AD & therefore, PL, GDP, & emp. E 1 E 2 AD 2 “ Students, should the Fed increase or decrease the money supply?” Jobs are tough to get. LRAS

D I AD 1 Y I D m Investment Demand Reall Interest Rate 10 8 6 0 Money Market QID 2 AS 10 8 6 0 P 2 MS 1 P 1 MS 2 If there is INFLATION , MS will be decreased. Sell QID 1 Y * “ Tight Money” during Inflation “ Tight Money” – (Buy/Sell) bonds, which (incr/decr) the MS, which (incr/decr) in. rates, which (apprec/deprec) the dollar, which (incr/decr) C, Ig, & Xn, which (incr/decr) AD, PL, & GDP. E 1 E 2 AD 2 “ Now, should I buy or sell ?” “ I’ll get rid of some money.” LRAS

Y R Y * Investment Demand 9 % 6% 3 % 0 Money Market $50 $60 AS AD 1 PL 1 9 % 6 % 3 % 0 MS 2 AD 2 PL 2 $70 Y I AD 3 D I D m PL 3 MS 1 MS 3 $100 120 140 Q I D I =$50] I =$60 I =$70 RDO The ideal economy is AD 2 , with I.R. at 6% & Ig at $60 billion .

First Board of Governors, 1914

Scored 1590 on SAT VP

2. Reserve Requirement - most powerful (seldom used) - affects money creation by changing ER and the multiplier - an increase of ½ of 1 % would increase bank reserves by over $5 billion - RR was 20% from 1937-1958 Sledgehammer of M onetary P olicy RR - Atomic Bomb of Monetary Policy

$10,000 [$9,000+$1,000] [In 1980, the RR was set at 12%; stayed there until 1992; went to 10%] “ E asy M oney ” AS AD 1 AD 2 Y R Y * PL $1,000 Initial deposit $900 [$900x10] $1,000 $810 $729 Monetary Expansion [10% RR] [1/.10=10] “ Easy Money” The Reserve Requirement “ Easy Money” – increase the money supply

$5,000 [$4,000+$1,000] “ Tight Money” - decrease the money suply RR at 20% - Tight Money Monetary Expansion (20% RR) [1/.20=M D of 5] “ Tight Money” $1,000 Initial deposit $800 $640 $512

3. Discount Rate Fed loans to banks Hurricane EarthQuake FL borrowed $99 million In 1991

Part of Uncle Sam’s Menu

Only “fiscal or monetary policy” can get me back on my feet and allow “Sam” to get back up. “ Help”

Presidents try to put a positive spin on a struggling economy

The End