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Warm-Up

This article provides an introduction to the Federal Reserve, its functions, and its role in maintaining financial stability. It also explores the concept of the money multiplier and how changes in the reserve ratio affect the money supply. Learn more about the Federal Reserve and its impact on the economy.

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Warm-Up

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  1. Warm-Up • What is the money multiplier if the reserve ratio is 4%? • How much will M1 increase if you deposit $1,000? • Will M1 increase more or less if the reserve ratio changes to 10%?

  2. Intro to the Federal Reserve Chapter 30: Money, Banking, and the Federal Reserve (pages 812-815)

  3. Federal Reserve 101 http://www.stlouisfed.org/education_resources/in-plain-english-video/

  4. Functions served by the Fed • Provide financial services • Regulate banking institutions • Maintain stability of system • Conduct monetary policy • Keep prices stable (~ 2% inflation) • Increase jobs

  5. Provide financial services • “Banker’s bank…” • Clear checks • Make loans • Provide cash • Serve as federal govt’s bank

  6. Regulate banks • Ensure financial stability • Regional banks regulate their district

  7. Maintain financial stability • Provide liquidity to financial institutions • Prevent bank runs

  8. Conduct monetary policy • Primary responsibility of Fed • Variety of tools to do this

  9. Reserve requirement • Banks must keep 10% in reserve • May borrow money if reserves are lacking • FEDERAL FUNDS MARKET • Charged FEDERAL FUNDS RATE

  10. Discount Window • Way banks borrow from Fed • Charged DISCOUNT RATE • Usually 1 point higher than federal funds rate

  11. Open market operations • Sale/purchase of U.S. debt • In form of TREASURY BILLS

  12. Fed Buys T-Bills Money Supply T T T T T T T T

  13. Fed Sells T-Bills Money Supply T T T T T T T T

  14. Fed and M1 Summary

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