how does the fed stabilize economies?

HOW DOES THE FED USE MONEY TO STABILIZE

ECONOMIES?

Monetary Policy Money, Measures, Time Value, Creation

What is SCRILLA? (Money)

Medium of Exchange Can trade with it

Unit of Account (Value) Shows worth

Store of Value Maintains value

3 types of $ are included in the Money Supply, the FED Controls M1 and M2

MONEY SUPPLY

Types of Cash Stacks: M1

M1

Currencies and Coins

Demand Deposits Traveler’s Checks and

Checking Accounts

TYPES OF CASH STACKS: M2

M2STORE OF VALUE

Less Liquid…

(slower to convert to

cash)

M1 + Savings Deposits Time deposits Money Market Deposits Mutual Funds

TYPES OF CASH STACKS: m3

M3The least liquid

M2 +…

Large Time Deposits (over $100,000)

TIME VALUE OF MONEY

Value falls with INFLATION Interest Rates equate dollars

today with dollars in the FUTURE

HOW DOES THE FED USE THE MONEY SUPPLY TO

PREDICT GDP?

MV = PQ

PQ = Nominal GDP

M = Money Supply (M1 or M2)

V = Money’s Velocity (# of times Dollars is Spent)

P = PL (AS/AD) Q = Real GDP

MONETARY EQUATION OF EXCHANGE

The Money Market

R = Nominal Interest Rate

R

R

QM

MS

MD

Q

CREATE THE NEW CURRENCY DESIGN FOR A DEVELOPING COUNTRY THAT INCLUDES:Component Description Points

Possible

Currency Basic Details

Includes Country Chosen, Currency, Current President, and Exchange Rate Against the Dollar

5

Functions of Money

Includes the 3 functions of Money on the Front

9

Quantity Theory of Money

Includes the Equation and what each letter represents

6

Types of Money Includes the 3 types of Money and a Brief Description of Each

9

The Money Market Graph

Includes the Money Market Graph with a conclusion of how the FED might influence it

11

Overall Quality Neat, well-designed, colored and includes the basic shape of a currency.(Can receive extra points for creativity or the graph that determines a currency’s value)

10

HOW CAN THE FED USE THE MONEY SUPPLY TO ACHIEVE FULL

EMPLOYMENT AND PRICE STABILITY?

THE FED: Central Bank

Tools Of Monetary Policy

% of $ that must be stored

Determines the multiplier (1/required

reserves) Usually 10% or .1

Interest banks pay the Fed for loans Decrease = banks

borrow more Increase = banks

borrow less

Reserve Ratio = RR Discount Rate

Tools of Monetary Policy

Interest Rate banks pay each other for loans

Buy Bonds: “Bigger Bucks”

Increase MS Sell Bonds:

“Smaller Bucks” Decrease MS

Federal Funds RateOpen Market Operations:

Treasury Bonds **

** = most frequently used Tool

Types of Monetary Policy

Expansionary

“Easy Money”

Contractionary

“Tight Money”

Increase MS ($$)

R

R

QM

MS

MD

Q

R1

MS1

Q1

Expansionary Monetary Policy

DECREASE MS (-$$)

R

R

QM

MS

MD

Q

R1

MS1

Q1

Contractionary Monetary Policy

Expansionary

1. Fed buys bonds, lowers Federal Funds, Reserve Requirements, Discount Rate “Bigger” Bucks

2. Increase MS

3. R↓

4. IG↑

5. ↑ AD

R

R

QM

MS

MD

Q

i1

MS1

Q1

R

IG

ID

I I1

R

i1

GDPR

PL

AD

SRAS

LRAS

YF

P

Y

AD1

P1

EXPANSIONARY

Contractionary

1. Fed sells bonds, raises Federal Funds, Reserve Requirements, and Discount Rate “Smaller” Bucks

2. Decrease MS

3. R ↑

4. IG ↓

5. ↓ AD

Currency: BACKComponent Description Points

Possible

Country’s Major Land Mark/ Resource

Includes Image of Major Landmark or Resource within the Country’s Currency

5

Tools of Monetary Policy

Includes the 4 tools of Monetary Policy on the Back with a description of each

9

Types of Monetary Policy

Includes the Definition of Expansionary and Contractionary Monetary Policy

6

3 Graphs of effects of Expansionary Policy

Includes the domino effects of how MP eventually affects Aggregate Demand

10

Extra Decorations

Includes images within the currency that demonstrate the religious and/or cultural traditions within the country

10

Overall Quality Neat, well-designed, colored and includes the basic shape of a currency.

10

Total 105