Discussion: "The Federal Reserve and Monetary Policy"

Visit the Federal Reserve website and answer the following questions in your own words.

Part 1:

• What is the mission and legal mandate of the Federal Reserve System?
• What policy tools are available to the Fed to achieve its mission?
• What is the difference between an insolvent bank and an illiquid bank?

o Why/how does the Fed treat banks that are insolvent differently from illiquid banks?

Part 2:

The Fed has only increased the interest or discount rate twice since the 2007/08 recession. Will it push the rates up a bit more? We don't know! We can find out what those at the Fed are thinking by checking out posted information each month by the FOMC (Federal Open Market Committee).

• According to the Fed, what are its inflation and full-employment targets?

• Explain how changes in the money supply will raise interest rates and how the anticipated increase in interest rates will likely affect GDP and employment.