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Federal Reserve

Federal Reserve . Monetary Policy Determined by Federal Reserve Board. Reasons for actions of the Fed. 1. Avoid inflation 2. Avoid Recession Inherently, these are opposite goals, so the Fed attempts to steer between two extremes like a driver in a car avoids driving outside the lane.

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Federal Reserve

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  1. Federal Reserve

  2. Monetary Policy Determined by Federal Reserve Board

  3. Reasons for actions of the Fed • 1. Avoid inflation • 2. Avoid Recession • Inherently, these are opposite goals, so the Fed attempts to steer between two extremes like a driver in a car avoids driving outside the lane.

  4. 3 tools • 1. Discount Rate – Rate banks borrow from Fed (affects rate the banks will charge their customers) • 2. Reserve Rate – Amount of bank’s deposits that must be kept in vaults • 3. Buying and selling of treasuries

  5. Discount Rate • Raising the discount rate makes it harder for individuals and businesses to borrow money, slowing down the economy, avoiding inflation • Lowering the discount rate accelerates the economy – it’s easier to borrow money, easier to buy goods/services and expand business

  6. Reserve Rate • Lowering the Reserve Rate makes more money available for loaning out, accelerating business • Raising the Reserve Rate makes less money available, slowing down the economy

  7. Treasuries • Buying Treasuries puts more money into the money supply, accelerating the economy, but risking inflation • Selling Treasuries puts money out of the money supply, avoiding inflation, but slowing down the overall economy

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