TAILIEUCHUNG - Lecture Economics: The basics (2/e): Chapter 12 - Michael Mandel

Chapter 12 - Monetary policy. After reading the material in this chapter, you should be able to: List the three uses of money, describe the history and structure of the federal reserve system, identify the major goals of monetary policy and list the policy tools used by the federal reserve, explain how changing the fed funds rate can affect the economy, discuss how the Federal Reserve can use direct lending to fight a financial crisis. | Chapter 12 Monetary Policy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives List the three uses of money. Describe the history and structure of the Federal Reserve System. Identify the major goals of monetary policy and list the policy tools used by the Federal Reserve. Explain how changing the fed funds rate can affect the economy. Discuss how the Federal Reserve can use direct lending to fight a financial crisis. Compare and contrast monetary policy and fiscal policy. 12- The Uses of Money Money is an asset that serves three purposes: First, it is a medium of exchange. You can use money to buy goods and services and accept it in exchange for the goods and services that you provide. A market economy depends on money. Second, money is a store of value. Finally, money is a standard of value. 12- The Federal Reserve The Federal Reserve (Fed) is the country’s central bank. It was created by Congress in 1913 in response to the financial panic of 1907. The Federal Reserve has the power to issue currency, set interest rates, and lend directly to banks. 12- The Structure of the Federal Reserve The Federal Reserve is a system of banks. It is headed by the Federal Reserve board, located in Washington, and consists of seven members, including the Chairman. There are also twelve regional Federal Reserve banks located around the country. The Federal Reserve was designed to have considerable independence in making policy decisions. 12- The Goals of Monetary Policy The original goal of the Federal Reserve was to maintain the stability of the financial system. The Humphrey-Hawkins Act in 1978 specified a broader set of goals. The main goals of the Fed today are controlling inflation, smoothing out the business cycle, and ensuring financial stability. 12- Controlling Inflation The top goal of the Federal Reserve is to keep inflation under control. Prior Chairmen of the Fed have argued that a low and

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