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.

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.

• Fed Explained: Episode 4 — The Central Bank
• Feducation: Episode 1—Money and Inflation