Chapter 4
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CHAPTER 4. Functions of the Fed. CHAPTER 4 OVERVIEW. This chapter will: A.Identify the key components of the Fed B.Describe how the Fed influences monetary policy. A. Organization of the Fed. 1. Federal Reserve District Banks a. 12 national districts

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CHAPTER 4

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Chapter 4

CHAPTER 4

Functions of the Fed


Chapter 4 overview

CHAPTER 4 OVERVIEW

This chapter will:

A.Identify the key components of the Fed

B.Describe how the Fed influences monetary policy


A organization of the fed

A. Organization of the Fed

1. Federal Reserve District Banks

a. 12 national districts

b. New York is considered most important

c. Member banks (those commercial banks) must purchase stocks in their Federal Reserve district bank

d.Each district has 9 directors

e.District banks:

1.) clear checks

2.) replace old currency

3.) provide loans to member banks

4.) collect economic data and conduct research


A organization of the fed1

A. Organization of the Fed

2. Member Banks

a. Required of all nationally chartered banks

b. At present, about 35% of all banks are member banks

c.Member banks hold about 70% of all bank deposits in the U.S. economyy


A organization of the fed2

A. Organization of the Fed

3. Board of Governors

a. Composed of 7 members appointed by the President for a 14 year non-renewable term

b.Chair selected by President to serve a renewable 4 year term

Alan Greenspan (1987-2006); Ben Bernanke (2006- )

c. Roles of the Board:

1.) regulate commercial banks

2.) control monetary policy:

revise reserve requirements on depository institutions; change interest rate; buying or selling bonds through Federal Open Market Committee.


A organization of the fed3

A. Organization of the Fed

4. Federal Open Market Committee (FOMC)

a. Made up of 7 members from the Board of Governors plus the presidents of 5 district banks. Chair of FOMC is also the Chair of the Board of Governors.

b.Main goals:

1.) achieve stable economic growth

2.) stabilize inflation


B monetary policy tools

B. Monetary Policy Tools

1. Open Market Operations

a. FOMC Meets 8 times/year

b. Communication to the Trading Desk

c. Role of the Trading Desk

d. Fed purchase of Securities: increase in money supply

e. Fed sale of Securities: decrease in money supply

Discussion: how open market operations affect all interest rates?


B monetary policy tools1

B. Monetary Policy Tools

2. Adjusting the interest Rate lending to depository institutions to influences the market interest rates

3. Adjusting the Reserve Requirement Ratio

Reserve Requirement Adjustments affect Money Growth because higher reserves lead to less borrowing and

lower reserves lead to more borrowing


Exhibit 4 3 illustration of multiplier effect

Exhibit 4.3 Illustration of Multiplier Effect


C global monetary policy

C.Global Monetary Policy

Each country has its own central bank that controls the money supply and monetary policy

1. A Single Eurozone Monetary Policy

a. Impact of the Euro on Monetary Policy

1.) 12 European countries made their currency the euro

2.) European Central Bank based in Frankfurt

3.) Monetary policy set for the 12 members

b. Variations in the Value of the Euro

fluctuated widely since introduced in1999


Summary

Summary

  • 1. The structure of Fed

  • 2. The goal of Federal Open Market Committee

  • 3. How does Fed affect money supply

  • 4. Homework Assignment 3: Questions and Applications 2, 3, 9.

    more assignment 3 in Chapter 5.


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