| A | B |
|---|
| Interest | (1) is the cost (2) the price of using somebody else's money |
| Interest | (1) what you pay on borrowed money (2) what you earn when people borrow your money |
| Federal Reserve (the Fed) has three tools to regulate the money supply. | (1) changing the reserve requirements (how much money banks can loan) (2)setting the discount rate (fee banks pay for borrowing money from the fed) (3) buying and selling bonds (a government I.O.U.) |
| Reasons for Adjusting the Reserve Requirement | (1) normal people deposit money into banks to save (2) banks take that money and loan it to other people (3) banks must hold on to some money in case you want your money back |
| Reserve Requirement | (1) what the amount of money the bank must hold onto is called |
| The Reserve Requirements must be | (1) lowered when the economy is in a recession or depression |
| The Reserve Requirements must be | (1) increased when the economy is expanding to fast (inflation) |
| If the economy is weak (recession) | (1) reduce the reserve requirement so banks can loan more money to consumers |
| With a Reduced Reserve Requirement | (1) banks can lend more money to consumers (2) people have more money to buy goods and services (3) business make more money (4) the economy expands and inflation is eminent |
| If the economy is too strong (inflation) | (1) increase the reserve requirements (banks loan less money to spend) |
| With an increased Reserve Requirement | (1) banks have less money to lend (2) banks must hold onto a larger reserve (3) holding onto a larger reserve causes banks to have less money to lend to consumers (4) banks can't give loans to consumers (5) people have less money to spend (5)prices are lower so inflation ends (6) prices are low because there's a glut (supply) of products on the market so price is lowered (d/t no demand) |
| Banks borrow money from the gov't | (1) then use that money to make loans to regular people (2) the gov't lowers the interest rates so more consumers can borrow money to buy everyday items and big ticket items |
| The Discount Rate | (1) the fee the banks pay the feds to borrow money |
| The feds | (1) lowers the discount rate in a down turn (recession/depression)in the economy |
| The Feds | (1) increases the discount rate when the economy is expanding too fast (inflation) |
| If the economy is weak (recession) | (1) the feds decrease the discount rate to make money cheap and banks can lend money to more consumers |
| The Feds | (1) charges banks less money to borrow from them (2) banks can then give more loans to consumers at lower interest rates (cheap to borrow) (3) consumers will (a) take loans (b) spend money |
| expansion (fixes economy) | (1) a way of stimulating the economy (2) consumers will take loans, spend money (3) the money loses value because there's a lot of it floating around |
| If the economy is too strong (inflation) | (1) the feds increase discount rate (money is more expensive to borrow) |
| If the economy strong (inflation) | 1) the Feds charge banks MORE to borrow! (2) banks either loan less OR have to loan at HIGHER interest (3) consumers won’t take loans at high interest, so no money to make purchases (Killing inflation!) |
