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THE FEDERAL RESERVE SYSTEM The Fed was created in 1914 after a series of bank failures convinced...
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THE FEDERAL RESERVE SYSTEM
• The Fed was created in 1914 after a series of bank failures convinced Congress that the United States needed a central bank to ensure the health of the nation’s banking system.
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The Fed’s Organization
• The Federal Reserve System is made up of the Federal Reserve Board in Washington, D.C., and twelve regional Federal Reserve Banks.
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The Federal Reserve System
Copyright©2003 Southwestern/Thomson Learning
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The Fed’s Organization
• The Fed is run by a Board of Governors, which has seven members appointed by the president and confirmed by the Senate.
• Among the seven members, the most important is the chairman. – The chairman directs the Fed staff, presides over
board meetings, and testifies about Fed policy in front of Congressional Committees.
Janet Yellen
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The Federal Open Market Committee (FOMC)• Three Primary Functions of the Fed
1.Regulates all banks operating in each region(monitors their accounting, balance sheet etc.)
2.Acts as a banker’s bank, making loans to banks, conducts check clearing and other financial services.
3. Conducts monetary policy by manipulating the money supply. (make $ easy or difficult to get)
–TWO GOALS OF MONETARY POLICY–1. Ensure Price Stability–2. Foster Growth in the Economy
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The Fed’s Tools of Monetary Policy
• The Fed has three tools in its monetary toolbox:– Changing the discount rate
• The rate that the Fed. charges banks to lend them money
– Open Market Operations– Changing the reserve requirement
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The Fed’s Tools of Monetary Control
• Changing the Discount Rate– The discount rate is the interest rate the Fed
charges banks for loans.• Increasing the discount rate decreases the money
supply. • Decreasing the discount rate increases the money
supply.
The discount rate is the lowest interest rate in the country, because it’s loans the FED makes to its member banks.
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“”Easy” Monetary Policy
“Tight” Monetary Policy
“Easy” Monetary Policy
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The Fed’s Tools of Monetary Policy• Open-Market Operations
– The Fed conducts open-market operations when it buys government bonds from or sells government bonds to the public:
• When the Fed buys government bonds, the money supply increases.
» HOW? Let’s figure this one out!» Yes, you can buy U.S. bonds Weekly Treasury Bond» How can I buy Treasury Bonds?
• The money supply decreases when the Fed sells government bonds.
Yes, you can buy U.S. bonds Weekly Treasury Bond Auction –
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The Fed’s Tools of Monetary Control
• Changing the Reserve Requirement– The reserve requirement is the amount (%) of a
bank’s total reserves that may not be loaned out.• Increasing the reserve requirement decreases the
money supply. • Decreasing the reserve requirement increases the
money supply.
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Summary
• Because the Fed cannot control the amount bankers choose to lend or the amount households choose to deposit in banks, the Fed’s control of the money supply is imperfect.
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Let’s see what you learned
• If the Fed wants to increase the money supply, list 3 things it can do.– Buy gov. bonds in the OPEN MARKET (open
market operations)– WHY?
– Lower the reserve rate– WHY?
– Lower the discount rate– WHY?
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If the Fed wants to decrease the money supply, list three things it can do.
Sell gov. bonds in the OPEN MARKETWHY?
Raise the reserve ratioWHY?
Raise the discount rateWHY?