Transcript Money, Banking and Monetary Policy

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1. Medium of exchange – usable for buying and
selling goods
2. Unit of account - dollar value of goods and
services
3. store of value - transfer of purchasing power
from the present to future
what is money video
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At the core of monetary policy is the regulation of
the money supply.
M1 – currency, checkable deposits
M2 – Near money (savings, small time
deposits, MMMF)
Federal Reserve Notes are token money (fiat)
Checkable deposits are large component
Currency held by the FED, thrift, banks are
excluded
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Paper money is circulating debt of the Federal
Reserve banks and checkable deposits are debt of
commercial banks and thrift institutions.
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The value of money is determined by its
acceptability legal tender – medium of exchange
A valid and legal form of payment of debt
Relative scarcity is based on supply and demand.
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The amount a dollar will buy varies inversely with
the price level.
Ex. When the CPI goes up, the value of the dollar
goes down or if prices fall, the purchasing power of
the dollar doubles.
 $V = 1/P
 $V = the value of the dollar
 P = Price
 Determine the $V if P rises by 20% from $1 to .80
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When we talk about monetary policy we are really
talking about money supply policy.
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Increase/Decrease in the money supply
 How does this work?
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Tips:
 Increase - lowers interest rates as surplus money moves into
the bond market, increasing bond prices
 Decrease - increases interest rates as a shortage of money
creates a sell-off of bonds, decreasing the bond prices
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Central Authority is the Board of Governors – 7
members that serve staggered 14 year terms –
appointed by the president and confirmed by the
Senate
12 Fed Banks – central bank, banker’s bank, they
blend private ownership and public control.
Member banks are required to buy “stock” in the
Federal Reserve
The Fed is the lender of last resort for the member
banks regarding loans to member banks
Issue currency aka Federal Reserve Notes
What is the Fed?
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Central bank of
the United States
Established in
1913
Purpose is to
ensure a stable
economy for the
nation
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Conduct the nation’s monetary policy
Supervise and regulate banking institutions
Operate a nationwide payments system
Serve as the bank for the US Treasury
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Board of Governors
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12 Reserve Banks
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Federal Open
Market Committee –
chief policymaking
body of the FED
system
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Seven members
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Appointed by the president
Confirmed by the Senate
Serve staggered 14-year
terms
Work includes:
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Analyzing economic
developments
Supervising and regulating
the operations of Federal
Reserve Banks
Exercising responsibility in
the nation’s payments
system
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Work includes (cont’d):
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Administering consumer
credit protection laws
Authorizing changes in
banks’ reserve
requirements
Supervising Fed member
banks and other financial
entities
Authorizing changes in
the Fed’s discount rate
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Operate a nationwide payments
system
Distribute the nation’s currency
and coin
Supervise and regulate member
banks and bank holding
companies
Serve as banker for the U.S.
Treasury
Contribute to monetary
policymaking through Bank
presidents’ participation in the
FOMC
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Promote safety and soundness
of banking system along with
other regulatory bodies
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FDIC, OCC, OTS, state banking
regulators
Ensure compliance with laws
and regulations
Oversee international banking
interests
Administer consumer credit
protection laws
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Supply currency and
coin to banking
institutions
Clear more than onethird of nation’s checks
Transfer funds
electronically (ACH,
Fedwire)
Serve as bank for the
U.S. Treasury
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Gather, analyze and
disseminate economic
data
Focus on all aspects of
the economy (regional
to international levels)
Analyze regional and
national markets and
economic data
Design and test
econometric models
used to produce hard
data that factor into
policymaking decisions
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Policy changes affect
the nation’s supply
of money and credit.
Actions have real
short- and long-term
effects on the
economy.
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Sets and directs U.S.
monetary policy
Seven governors
Five presidents (New York
and four others on a rotating
basis)
Nonvoting presidents
participate fully
Final interest rate decision is
made by the 12-member
Federal Open Market
Committee (FOMC)
Full
Employment
Stable Prices
Sustainable
Economic Growth
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Discount Rate
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Reserve Requirements
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The interest rate charged by the Federal Reserve to
banks that borrow on a short-term (usually
overnight) basis
The amount of money banks must keep on reserve at
the Fed
Open Market Operations
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Buying and selling Treasury securities between the
Fed and selected financial institutions in the open
market
Most important tool; directed by the FOMC
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Federal Funds Rate
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The market-based interest rate
which banks charge each other on
overnight loans of their reserve
balances held at the Fed. The Fed
achieves this rate through Open
Market Operations.
A target rate
Discount Rate
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Applies to short-term loans made
directly to commercial banks from
the Federal Reserve System.
Typically set at 1 percentage point
above the Federal Funds Rate.
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Each head office and branch of the Federal
Reserve System has a local Board of Directors.
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7–9 individuals
Board members provide various perspectives
and economic data from different regions and
industries.
Boards of directors vote on the discount rate.
Boards of directors influence policymaking at
the national level through “real-world” input.
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Generally, low interest
rates stimulate the
economy because there is
more money available to
lend.
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Consumers buy cars and
houses.
Businesses expand, buy
equipment, etc.
Why does the Fed lower
interest rates?
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If inflation is in check, lower
rates stimulate economic
activity, thus boosting
economic growth.
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The Fed raises interest
rates as an effective way
to fight inflation.
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Inflation—a sustained rise
in the general price level;
that is, all prices are rising
together.
Consumers pay more to
borrow money,
dampening spending.
Businesses have
difficulty borrowing;
unemployment rises.
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Monetary policy DOES NOT affect government
spending!
In a deep recessionary gap
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In a mild recessionary gap
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expansionary monetary policy used to assist expansionary
fiscal policy - risk inflation burst
contractionary monetary policy could be used to offset
expansionary fiscal policy - risk rising interest rates
In an inflationary gap
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contractionary monetary policy could be used to assist
contractionary fiscal policy - risk rising unemployment
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What are the three main roles of the
Federal Reserve System?
Where is your Fed?
What are the goals of monetary
policy?
What happens when the Fed lowers
interest rates? Raises interest rates?
What is inflation? Why should it
concern you?
What is the name of the Fed’s
monetary policymaking body?
What is the discount rate? Federal
funds rate?
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Show a world of money video
When the government writes a check
link – 10 mins
http://www.pbs.org/newshour/bb/bu
siness-jan-june09-solman_03-17/