The federal reserve and monetary policy
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The Federal Reserve and Monetary Policy. Chapter 16. Banking History. Monetary Policy: the actions the FED takes to influence the level of real GDP and the rate of inflation in the economy. The Federal Reserve Act of 1913. Passed by Congress to deal with problems of bank runs and panics.

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The Federal Reserve and Monetary Policy

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The Federal Reserve and Monetary Policy

Chapter 16


Banking History

  • Monetary Policy: the actions the FED takes to influence the level of real GDP and the rate of inflation in the economy


The Federal Reserve Act of 1913

  • Passed by Congress to deal with problems of bank runs and panics.

  • Creates “the FED”

    • 12 independent regional banks that can lend to other banks in times of need.


The Great Depression

  • The FED fails during this period because the banks still acted independently


A Stronger Fed

  • 1935 the Fed’s structure was reorganized by Congress.

    • Allowed for better handling of crises.


Structure of the Federal Reserve

  • Oversee the Fed

  • 7 members, 14 year terms, staggered


Chairman

  • Chosen from the 7 members by the president.

  • Serves a 4 year term

  • Specialist in keeping

    crises from getting out

    of control.


Twelve Federal Reserve Banks


Twelve Federal Reserve Banks

  • Each bank has a board of nine directors.

  • Chicago Board of Directors


Member Banks

  • All nationally chartered banks are required to join the Federal Reserve System.

  • Some state chartered banks voluntarily join.

  • 2,600 total banks


Adjust interest rates and the money supply

Consist of the Board of Governors (7) and then 5 of the twelve regional bank presidents.

NY Permanent, others rotate 1 year terms

The Federal Open Market Committee (FOMC)


The Federal Reserve Functions

Chapter 16 Section 2


Handles their banking

Medicare, social security, and veteran benefits.

Banker and Agent

Has treasury department checking account

Agent by handling bonds, bills, notes and interest payments.

Serving Government


Issuing Currency

  • Federal Reserve Notes

    • In charge of circulation

    • http://www.moneyfactory.gov/

    • http://www.newmoney.gov/newmoney/flash/5Currency/unveil5new.html


Check Clearing

Supervising Lending Practices

Lender of Last Resort

Expanded role due to financial crisis of 2008

Serving Banks


Regulating the Banking System

  • Each financial institution must report daily its reserves.

    • Must maintain 10%

  • Bank Examinations


Watch the Demand for Money and use this info to stabilize the economy.

Prevent inflation and keep real GDP growing

Regulating the Money Supply


Monetary Policy Tools

Chapter 16 Section 3


Money Creation

  • Treasury manufactures money

  • FED puts it into circulation


How Banks Create Money

  • Fractional Reserve (RRR) Required Reserve Ration

  • Loans with interest payments

  • Money Multiplier Formula

    • Increase in money supply = initial deposit x 1/RRR


Reserve Requirements

  • Easiest way to change money supply is for FED to adjust reserve ratio.

  • RRRM1

  • RRRM1


Discount Rate

  • The rate the FED charges banks on loans.

    • Also affects money supply

    • Rare to be used, instead use other banks and the federal funds rate.


Open Market Operations

  • The buying and selling of government securities in order to alter the supply of money.

  • Sell bonds to decrease money supply.

  • Buy bonds to increase money supply.


Monetary Policy and Macroeconomic Stabilization

Chapter16 Section 4


How Monetary Policy Works

  • Monetary policy affects money supply which in turn affects interest rates, which then affects investment and spending.

  • A lot of money = low interest

  • No money = high interest


Good timing smoothes out the business cycle.

Bad timing intensifies the cycles

The Problem of Timing


Lags

  • Inside lag is the time it takes to implement monetary policy

  • Outside lag is the time it takes for monetary policy to have an effect.


How Quickly Does the Economy Self-Correct?

  • Economists Disagree

  • Estimates 2-6 years


Homework

  • Page 442 #1-5


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