Crash Course Economics: Monetary Policy

Introduction

• Hosts: Jacob Clifford and Adrienne Hill
• Focus of the lecture: Monetary policy
• Mention of influential figures like Janet Yellen, the Fed Chair

Central Banks

• Federal Reserve (Fed): Central bank of the USA
• European Central Bank (ECB): Central bank for Europe
• Key roles of central banks:
  • Regulate commercial banks and ensure adequate reserves
  • Conduct monetary policy: Adjusting the money supply to influence the economy

Monetary Policy

• Interest Rates:
  • Price of borrowing money; includes principal and interest rate
  • Influences loans for cars, homes, businesses, etc.
  • Low rates = more borrowing and spending; High rates = less borrowing and spending
• Fed's Role in Interest Rates:
  • Fed can’t set bank interest rates directly; manipulates them by altering the money supply
  • Expansionary Policy: Increase money supply, decrease interest rates to boost economic activity
  • Contractionary Policy: Decrease money supply, increase interest rates to slow down economic activity

Examples of Monetary Policy

• Post-9/11 and Dot-com Bust: Fed increased money supply to combat recession
• 1970s Inflation: Fed decreased money supply to control high inflation, increased unemployment as a downside
• Great Depression: Fed’s failure to ensure liquidity and confidence prolonged the depression

Tools of the Fed

• Fractional Reserve Banking:
  • Banks hold a fraction of deposits in reserve (reserve requirement)
• Methods to Change Money Supply:
  1. Reserve Requirement: Altering the fraction banks must hold
  2. Discount Rate: Interest rate Fed charges banks for loans
  3. Open Market Operations: Buying/selling government bonds to adjust liquidity
• Quantitative Easing (QE):
  • Buying longer-term securities to increase money supply during crises
  • 2008 Financial Crisis: Fed used QE as additional stimulus

Inflation and Excess Reserves

• Concerns about inflation due to increased money supply post-2008
• Excess Reserves: Banks holding more than required, impacting money circulation

Conclusion

• Monetary vs. Fiscal Policy:
  • Monetary policy is quicker and effective for typical fluctuations
  • Fiscal policy might be needed for severe downturns
  • Effectiveness depends on non-political central banks
• Understanding of monetary policy allows better recognition of influential figures like Janet Yellen

Outro

• Invitation to support Crash Course via Patreon for educational content