Content Standard 20: Fiscal and Monetary Policy

Grade 12 Benchmarks

7. Monetary policies are decisions by the Federal Reserve System that lead to changes in the supply of money, short term interest rates, and the availability of credit. Changes in the growth rate of the money supply can influence overall levels of spending employment and prices in the economy by inducing changes in the levels of personal and business investment spending.

8. The Federal Reserve System’s major monetary policy tool is open market purchases or sales of government securities, which affects the money supply and short-term interest rates. Other policy tools used by the Federal Reserve System include making loans to banks (and charging a rate of interest called the discount rate). In emergency situations, the Federal Reserve may make loans to other institutions. The Federal Reserve can also influence monetary conditions by changing depository institutions’ reserve requirements.

9. The Federal Reserve targets the level of the federal funds rate, a short-term rate that banks charge one another for the use of excess funds. This target is largely reached by buying and selling existing government securities.

10. The Federal Reserve tends to increase interest rate targets when it feels the economy is growing too rapidly and/or the inflation rate is accelerating. It tends to lower rate targets when it wants to stimulate the short-term growth of the economy.

Note: The most recent version (2010) of the Voluntary National Content Standards does not align with the Fed’s ample reserves implementation of monetary policy. You can read our recommendations for updating the Voluntary National Content Standards here:

https://www.federalreserve.gov...

• Independence, Accountability, and the Federal Reserve System (Page One Economics®)
• The Fed’s New Monetary Policy Tools Online Module
• Teaching the New Tools of Monetary Policy