McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.
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