In this chapter, students will be able to understand: List the characteristics of pure monopoly, explain how a pure monopoly sets its profit-maximizing output and price, discuss the economic effects of monopoly, describe why a monopolist might prefer to charge different prices in different markets, distinguish between the monopoly price, the socially optimal price, and the fair-return price of a government-regulated monopoly. | Chapter 12 Monetary Policy Chapter Outline GOALS, TOOLS AND A MODEL OF MONETARY POLICY CENTRAL BANK INDEPENDENCE MODERN MONETARY POLICY 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 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. Measures | Chapter 12 Monetary Policy Chapter Outline GOALS, TOOLS AND A MODEL OF MONETARY POLICY CENTRAL BANK INDEPENDENCE MODERN MONETARY POLICY 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 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. 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 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. The Tools of Monetary Policy Open Market Operations A relatively fine tool that can be used to make small adjustments. These adjustments can be daily and often occur without much fanfare. Targeted Interest Rates A relatively blunt tool that can be used to make large adjustments. In typical years, changes in targeted interest rates a few times per year. Reserve Ratio A rather blunt tool that is only used when very large adjustments are in order. Tools of Monetary Policy: Open Market Operations The Fed buys US government debt in order to get cash into .
