Monetary Policy and the Fed EconMovies 9 Despicable Me

hey how you eat Khan students this is mr. Clifford welcome to econ movies right now we're going to talk about monetary policy by looking at the movie Despicable Me monetary policy is when a central bank or other regulatory agency changes the money supply to achieve specific economic objectives well actually it's not that complicated the first thing that you need to know to understand monetary policy is the role of banks and bankers in the economy banks are financial institutions that link borrowers with lenders and although sometimes are perceived as evil they're absolutely essential to the health of the economy people with extra money deposit that savings in banks and the bank turns around and loans that money out to businesses and individuals that need to buy something expensive before giving that loan the bank analyzes the risk involved to make sure they get paid back do you have the audacity to ask the bank for money you have any idea of the capital that this Bank has invested in your crew how can I put it let's say this Apple is you if we don't start getting our money back the bank also charges an interest rate which is basically the price of borrowing money the lower the interest rate the cheaper the loan and the easier it is to pay back the higher the interest rate the more expensive the loan and the more difficult it is to pay it back we stop right there that's it this scene with the pillars shows the relationship between interest rates and the overall economy if the interest rate is really high then less people are going to take out loans because they don't be crushed by that giant interest rate consumer spending on big-ticket items is going to decrease and so the GDP is going to fall but if interest rates are really low the consumers can go and buy things like cars the lower the rate the more they can afford so interest rates affect consumer spending but they also affect business spending in the form of investment remember investment is when companies buy machines tools factories to produce more stuff if interest rates are really high and loans become more expensive then companies are going to invest less and produce less and possibly even go out of business the bank is no longer funding us in terms of money we have no money and if a lot of companies go out a business that could cause a recession and a whole lot of unemployment now would probably be a good time to look for other employment options so lending and interest rates affect the entire economy but what affects interest rates well the answer is the money supply but who controls the money supply the Federal Reserve is the central bank the United States and it's ran by Janet Yellen it regulates banks and controls the money supply change the money supply affects interest rates which can affect the entire economy that's called monetary policy a committee of bankers chaired by Janet Yellen set target interest rates that signal the health and overall direction of the economy an increase in the target range for the federal funds rate remains unlikely at our next meeting in April an increase in the target range could be warranted at subsequent meetings there's two types of monetary policy expansionary monetary policy is when the Fed increases the money supply and puts more money in the system this makes it easier for banks to loan out money so it lowers the interest rates that'll increase consumer spending and business spending which will increase the GDP and expand the economy contractionary monetary policy is when the Fed decreases money supply causing interest rates to go up that will decrease consumer spending and investment spending and slow down the overall economy now the goal isn't to ruin the economy and cause unemployment the goal is to fight inflation in fact some people say that inflation is the feds nemesis and normally spending is a good thing but if there's a whole lot of spending we're not producing more stuff then we're going to get higher prices in that case the Fed uses contractionary monetary policy to decrease the money supply raise interest rates and slow down the entire economy to fight inflation it's like the feds private shrink ray actually a Fed Chairman many years ago joke the main job the Fed is to take away the punchbowl once the party gets started some economists think the government shouldn't get involved in the overall economy but other economists think that some fine-tuning done by the Fed actually prevents some of the ups and the downs of the business cycle many economists think that economic calamities like the 2008 financial crisis would have been a whole lot worse if the Fed didn't step in now either way monetary policy along with fiscal policy are the two main weapons the government uses to fight high unemployment and high inflation whether some banks are too big to fail or whether we need more banking regulation one thing for certain we mean an effective way to make sure the worthy borrowers can buy things like homes or expand their business I really don't see how would you no fool of face hey chillax I just get another loan from the bank they love me okay thanks watch etho movies if you want to watch more go ahead and click right here if you want to learn other econ concepts click right here also leave a comment below let me know what videos and what topics you want me to cover next time also please make sure to subscribe write econ movies it's like the two best things in the world two best things to me movies in each on but maybe not to you but either way hey make sure to subscribe thanks for watching til next time