The Federal Reserve & Monetary Policy

1. The Federal Reserve & Monetary Policy

2. Essential Standards • The student will explain the role and functions of the Federal Reserve System. • The student will describe the organization of the Federal Reserve System. • The student will define monetary policy. • The student will describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment and economic growth. • The student will explain how changes in monetary policy can impact an individual’s spending and savings choices.

3. The Federal Reserve Act of 1913 • Created the Federal Reserve System… • Usually referred to as “the Fed”. • It is composed of 12 regional banks… • Overseen by a board of governors… • That lend money to private banks— “The Lender of Last Resort”. • All private national banks are required to join the Federal Reserve System. Janet Yellen Chair of the Federal Reserve

5. The Role of the Fed • The Fed is the bank of the United States… • It processes all government payments (social security, IRS refunds, etc.)… • It also makes interest payments on government bonds… • And is responsible for issuing currency.

6. The Banking System • The Fed provides “check clearing” services for member banks… • The process by which banks record whose account gives up money… • And whose account receives it. • It also supervises all lending practices… • And makes sure that customers receive accurate information from lenders—terms, conditions, interest, etc.

7. Reserves • Banks hold only a fraction of their funds in reserve… • The rest has been lent to its customers. • The Fed ensures that each bank keeps the required amount in reserve. • The amount the bank must keep on hand is called the… • Required Reserve Ratio (RRR).

8. Monetary Policy and the Money Supply • The most important role of the Federal Reserve is in controlling the money supply— • The total amount of currency held by individuals, plus money in bank accounts. • By controlling the money supply, the Fed influences… • The growth of the GDP. • The rate of inflation.

9. Which of the following is NOT a power held by the Federal Reserve? iRespond Question Multiple Choice F 281BBC1D-8E91-FF42-95A0-248A1B780DFB A.) setting tax rates. B.) controlling the RRR. C.) conducting monetary policy. D.) overseeing lending practices. E.) paying interest on government loans.

10. Influencing the Money Supply • The Fed controls the amount of money in the economy by three methods: 1. Altering the Reserve requirement: —Reducing the RRR… • Increases the money supply (bank loans are allowed to lend more money) • —Increasing the RRR… • Reduces the money supply (bank loans are limited).

11. Influencing the Money Supply • Open Market Operations… • When the Fed buys government bonds/securities, bond sellers receive money that enters the economy… …and the money supply… —Increases. …When the Fed sells bonds/securities, the money supply… —Decreases.

12. Influencing the Money Supply • Setting interest rates. • The discountrate—the interest rate the Fed charges on loans to other banks. • Lowering the discount rate makes loans cheaper… • Banks respond by lowering the Prime Rate— • The interest rate that banks charge their customers. • When the discount rate is lowered, the money supply… • INCREASES.

13. Which of the following would lead to an INCREASE in the money supply? iRespond Question Multiple Choice F EDFE88E0-5D80-2445-B775-0281BCDF042E A.) an increase in the RRR. B.) a reduction in tax rates. C.) the Fed’s purchase of government securities. D.) the construction of a highway. E.) an increase in the discount rate.

14. Which of the following would lead to a DECREASE in the money supply? iRespond Question Multiple Choice F E43DE655-5076-F24E-ABE3-18440B39640F A.) the Fed’s sale of government securities. B.) a decrease in the RRR. C.) a decrease in the discount rate. D.) an increase in marginal tax rates. E.) the construction of a new stadium.

15. Money Supply Philosophy: Tight Money • Tight MoneyPolicy—usually introduced in periods of expansion and inflation. • The Fed will DECREASE the money supply, which will slow down the economy. • There are three methods: 1. The RRR… increase it! 2. Government securities… sell ‘em! 3. The discount rate… increase it!

16. Money Supply Philosophy: Easy Money • Easy moneypolicy—is usually introduced during times of contraction or recession… • Is it designed to pump money into the economy to get it moving again. • There are three methods: 1. The RRR… lower it! 2. Government securities… buy ‘em! 3. The discount rate… lower it!

17. In 2008, US GDP declined by more than 2%. In response, you might infer that the Federal Reserve... iRespond Question Multiple Choice F 7E4CE592-9CC3-3242-BA07-594ECBC1DC5F A.) instituted a period of tight money policy. B.) called for an increase in marginal tax rates. C.) raised the discount rate by 3%. D.) instituted a period of easy money policy. E.)

18. In 2014, US GDP grows by more than 18%. This causes rates of inflation that exceed 7% and the Federal Reserve responds by... iRespond Question Multiple Choice F 3265B06B-BE80-9B40-83D4-0087B5D1B485 A.) raising the discount rate by eight points. B.) buying back billions of dollars in government securities. C.) lowering the RRR by 3% D.) instituting a period of easy money policy. E.)