Week 10 — The Federal Reserve & Monetary Policy

Why this matters

A first-time car buyer comparing loan rates and a small-business owner deciding when to borrow for new equipment both feel this week's ideas.

In plain language

This week is about the Federal Reserve (the central bank of the United States, often called the Fed) and the interest rates it helps set. The Fed runs monetary policy (changing the amount of money and the cost of borrowing to steer the whole economy). It has a short list of tools, and each one pushes the amount of money in the economy up or down. You will also meet the money market (the picture where the demand for money meets the supply of money), which shows how the amount of money sets an interest rate. By the end of the week you can name each tool, say which way it moves the money supply, and read the new interest rate off the picture.

• Already covered: Week 3 measured unemployment and inflation, and Week 9 built the money supply on the monetary base.
• This week: the Fed's goals and tools, and the money market.
• How they connect: the Fed's tools move the monetary base, which moves the money supply and the rate.
• Where we're going next: Week 11 follows the rate into spending and output.

Focus

Who sets the interest rate, and how do the Fed's tools move it?

By the end of this module, you should be able to:

• [ ] sort each Fed tool by how it moves the money supply
• [ ] solve the money market for the interest rate
• [ ] tell a movement along money demand from a shift

To-do

Plan your week

1. Read Chapter 10 (45 minutes), then the lecture and slides.
2. Work the tutorial (60–90 minutes) and practice set (20 minutes).
3. Do the Model Workshop (90 minutes), discussion, and assignment.
4. Take the quiz.

This week's checkpoint: find the new interest rate after the Fed buys bonds.

You've got this

Take it in order, and ask your instructor early.

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