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The Federal Reserve System “the Fed”. Reference Chapter 11. 12 Federal Reserve Districts. Commercial banks’ banker. Board of Governors. Board of Governors. 7 members appointed by president approved by Senate 14 yr. term chairman Ben Bernanke formerly Alan Greenspan.

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The federal reserve system the fed

The Federal Reserve System“the Fed”

Reference Chapter 11


12 federal reserve districts
12 Federal Reserve Districts

Commercial banks’ banker



Board of governors1
Board of Governors

  • 7 members

    • appointed by president

    • approved by Senate

    • 14 yr. term

    • chairman

      • Ben Bernanke

      • formerly

        • Alan Greenspan


6 major jobs of the fed
6 Major Jobs of the Fed

  • Supply the economy with paper money and coins.

  • Hold bank reserves.

  • Provide check-clearing services

  • Supervise member banks

  • Serve as lender of last resort.

  • Control the money supply


1 supply the economy with paper money and coins
1.Supply the economy with paper money and coins.

“U.S. Mint”

Bureau of Engraving and Printing


2 hold bank reserves
2. Hold bank reserves

reserves at the Fed + vault cash =total reserves


3 provide check clearing services
3.Provide check-clearing services

  • Facilitates check-cashing between commercial banks.

    • for example, Wells-Fargo and Bank of America


Between banks cities
Between banks, cities

  • EXAMPLE:

  • Pete pays Sue for a used car. He gives her a check for $2,000.

  • Sue deposits the check in her bank and is credited with $2,000 in her account.

  • Sue’s bank sends the check to FRB who increases the bank’s reserve account by $2,000.

  • FRB decreases Pete’s bank’s reserve by $2,000

  • FRB notifies Pete’s bank to reduce Pete’s account by $2,000.


4 supervise member banks 5 serve as lender of last resort
4. Supervise member banks5. Serve as lender of last resort

  • Fed may “audit” a bank

    • check that the loans it made are good

    • be sure it has followed banking rules

    • verify the accuracy of its accounting.

  • Fed can lend funds to struggling banks.

    • Glass-Steagall Act (1933) establishes FDIC


6 control the money supply i kept the most important for last
6. Control the money supply.I kept the most important for last!

  • Tools for changing the money supply

    • Reserve Requirement

    • Discount Rate

    • Open Market Operations

      Why is changing the money supply important?

      TO CONTROL INFLATION and/or UNEMPLOYMENT

      Monetary Policy


Prepare section review answers
Prepare Section Review Answers

11.1 page 292

1. Federal Open Market committee: major decision maker in the FRB.

2. Federal Reserve System : US Central Bank

3. Board of Governor’s : controls and coordinates fed activities (7 members)

4. Reserve account: funds required to be held in the FRB


Review
Review

Describe the structure of the Federal Reserve System.

7 member Board of Governors

appointed by president, ratified by Senate

14 year term, chairman

12 districts

In what year was it founded?

1913


Review1
Review

  • 6 major jobs?

  • Supply the economy with paper money and coins.

  • Hold bank reserves.

  • Provide check-clearing services

  • Supervise member banks

  • Serve as lender of last resort.

  • Control the money supply


Review2
Review

  • Why would a bank choose to join the Federal Reserve System?

  • FRB helps maintain bank stability

  • Consumers want their accounts to be covered by FDIC


Review3
Review

  • Describe the check-clearing process.

  • Pete pays Sue for a used car. He gives her a check for $2,000.

  • Sue deposits the check in her bank and is credited with $2,000 in her account.

  • Sue’s bank sends the check to FRB who increases the bank’s reserve account by $2,000.

  • FRB decreases Pete’s bank’s reserve by $2,000

  • FRB notifies Pete’s bank to reduce Pete’s account by $2,000.


The money creation process

The Money Creation Process

Reference 10.2

Think of our banking simulation for fractional reserve banking


The money creation process1
The Money Creation Process

  • Read 10.2 p. 293

  • Complete Section Review p. 300 #1-5


11.3

“Fed” Tools for Changing the Money Supply


These tools are used to implement
These tools are used to implement

MONETARY

POLICY

Monetary policy has two basic goals:

to promote "maximum" sustainable output and employment

to promote "stable" prices


Why would the fed want to change the money supply
Why would the Fed want to change the money supply?

  • Slow INFLATION

    • (too much money chasing too few goods)

  • Lower UNEMPLOYMENT

    • (too many people out of work)

  • Promote Growth in the Economy

  • Slow down an “over-heated” economy

    • Adjusting for the normal business cycle




  • Monetary policy
    Monetary Policy

    • Fed is responsible for maintaining price stability and employment

    • “Expansionary Monetary Policy”

      • goal is to increase money supply

        • to reduce unemployment

        • to avoid deflation

    • “Contractionary Monetary Policy”

      • goal is to decrease the money supply

        • to reduce inflation

        • To prevent “bubbles”


    3 important tools
    3 Important Tools

    • Changing the Reserve Requirement

    • Changing the Discount Rate

    • Conducting “Open Market Operations”

    The three tools are interactive


    1 reserve requirement currently 3 10
    1. Reserve Requirementcurrently: 3-10%

    • Raise the reserve requirement = Lessmoney in circulation

      • slows the economy

        • eventually brings price stability (lowers inflation)

    • Lower the reserve requirement = Moremoney in circulation

      • More money to buy goods and services

        • requiring more jobs to produce them

          (lowers unemployment)


    2 changing the discount rate
    2. Changing the discount rate

    • discount rate = interest rate on fed to bank loans (set by Fed)

    • federal funds rate = interest rate on bank to bank loans (set by fed funds market)

    Raising the interest rate influences how much banks will decide to borrow from the fed (who will lend them money “out of thin air”, increasing money supply)

    Keeping the discount rate low encourages borrowing


    federal funds rate=interest rate on bank to bank loansdiscount rate=interest rate on fed to bank loans

    Another bank

    When the federal funds rate is lower than the discount rate, who would you borrow from?

    When the discount rate is lower than the federal funds rate, who would you borrow from?

    • The Fed can encourage borrowing by keeping rates low

    The fed


    Currently discount rate 75 federal funds rate 0 25
    currently:discount rate - .75%federal funds rate - 0-.25%

    2006 discount rate - 6.25%

    federal funds rate - 5.25%

    What is the Fed trying to do?


    Federal open market committee fomc
    Federal Open Market Committee (FOMC)

    1

    • controls Open Market Operations

      • Open Market Purchases buys government securities = increases money supply

      • Open Market Sales sells government securities = reduces the money supply


    Important background information
    Important Background Information

    • U.S. Department of the Treasury

      • the agency of government responsible for paying for government and its actions

        • collects taxes

        • borrows money if needed

          • It borrows from the public by offering securities

            • securities: promises to repay with interest at some future time


    Open market purchases
    Open Market Purchases

    • Fed offers to buy your government security.

      • “Thin air” money is given to you.

      • Money supply increases


    Open market sales
    Open Market Sales

    • Fed offers to sell government securities it holds.

      • You pay for it.

      • Your money “disappears” into the Fed

      • Decreases the money supply.


    Review4
    Review

    • What are three ways the Fed can control the money supply?

    • Reserve Requirement

    • Discount Rate

    • Open Market Operations


    Review5
    Review

    • Why does the Fed want to control the money supply?

    • Monetary Policy:

      maintain employment

      control inflation


    Review6
    Review

    • What is the “reserve requirement”?

      • If the Fed wants to reduce the money supply, what does it do to the reserve requirement?

    • What is the discount rate?

      • What is the federal funds rate?

      • If the Fed wants to increase the money supply, what does it do to the discount rate?


    Review7
    Review

    • What is the difference between an Open Market Sale and an Open Market Purchase?

      • action?

      • goal?

    Complete 11.3 Section Review, p. 306 # 2-4


    Homework
    Homework

    • Read and note Chapter 13.1 “Inflation”

      • Include definitions from Section Review #1, highlighted

    • Section Quiz next class.


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