FEDERAL FEDERAL RESERVE (FED)RESERVE (FED)

*** In charge of the nation’s *** In charge of the nation’s money supplymoney supply

Key TermsKey Terms1. interest rates – the percent of money owed on money borrowed1. interest rates – the percent of money owed on money borrowed2. easy (loose) money policy – when FED lowers interest (discount) 2. easy (loose) money policy – when FED lowers interest (discount)

rate to make borrowing and spending easierrate to make borrowing and spending easier3. tight money policy – FED increases interest (discount) rates to 3. tight money policy – FED increases interest (discount) rates to

make borrowing and spending more difficultmake borrowing and spending more difficult4. monetary policy – using interest rates to control the money supply4. monetary policy – using interest rates to control the money supply5. reserve requirements – the amount of money regular banks are 5. reserve requirements – the amount of money regular banks are

required to keep in the FED bankrequired to keep in the FED bank6. consumer price index (CPI) – used to measure inflation. Take the 6. consumer price index (CPI) – used to measure inflation. Take the

average price of 400 everyday items over a period of time.average price of 400 everyday items over a period of time.7. Producer Price Index (PPI) – used to measure the cost of 7. Producer Price Index (PPI) – used to measure the cost of

producing products producing products 8. unemployment – you don’t have a job BUT you are actively seeking 8. unemployment – you don’t have a job BUT you are actively seeking

oneone9. full employment – when most everyone looking for a job is able to 9. full employment – when most everyone looking for a job is able to

find one; when unemployment is 4% or less!find one; when unemployment is 4% or less!10. truth in lending law – when you borrow money, terms of the loan 10. truth in lending law – when you borrow money, terms of the loan

must be disclosedmust be disclosed

I. Functions of FEDI. Functions of FED

A. supply moneyA. supply money

B. control interest (discount) B. control interest (discount) rates and reserve rates and reserve requirementsrequirements

C. clear checksC. clear checks

II. InflationII. Inflation

A. Demand pull inflationA. Demand pull inflation

1. increased consumer 1. increased consumer demand = higher pricesdemand = higher prices

B. Cost push inflationB. Cost push inflation

1. higher production costs = 1. higher production costs = higher priceshigher prices

III. Difference between III. Difference between monetary and fiscal monetary and fiscal

policypolicyA. Monetary PolicyA. Monetary Policy

1. Milton Friedman1. Milton Friedman

2. controlling interest rates to 2. controlling interest rates to control the money supplycontrol the money supply

B. Fiscal PolicyB. Fiscal Policy

1. John Maynard Keynes1. John Maynard Keynes

2. gov’t taxing and spending 2. gov’t taxing and spending used to control the economyused to control the economy