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Lecture Issues in economics today - Chapter 12

When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps. | Lecture Issues in economics today - Chapter 12 Chapter 12 Monetary Policy McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Chapter Outline GOALS TOOLS AND A MODEL OF MONETARY POLICY CENTRAL BANK INDEPENDENCE MODERN MONETARY POLICY McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. The Federal Reserve Nicknamed The Fed . Established in 1913 by Congress primarily as the authority for bank regulation. The power to coin money was granted to Congress by Article 1 Section 8 of the US Constitution but this power was delegated to the Federal Reserve. The power to regulate the amount that exists in the economy was granted to the Federal Reserve in an attempt to avoid the boom and bust periods of the late 1800s. This power allows the Federal Reserve to alter interest rates without political interference. There are 12 regional Federal Reserve Banks Boston New York Philadelphia Richmond Atlanta Cleveland St. Louis Kansas City Chicago Dallas Minneapolis and San Francisco McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Goals of Monetary Policy Provide sufficient money to the economy so that it may grow at a sustainable rate. Dampen the impact of the business cycle. McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Measures of the Amount of Money in the Economy Monetary Aggregate a measure of the quantity of money in the economy The commonly used ones are M1 cash coin and checking accounts M2 M1 saving accounts small CDs M3 M2 large CDs McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. The Banking System When a bank takes a deposit into an account on which a check can be written it must place a percentage of that deposit on reserve at a Federal Reserve bank. That percentage is called the reserve ratio. McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. The Tools of Monetary Policy Open Market Operations A relatively fine tool .