Transcript The Federal Reserve

The Federal Reserve
Purpose of “The FED”
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The Nation’s Central Bank
Control Money Supply
Regulate the Economy Through Monetary Policy
The Government’s Banker
Holds Reserves for Banking Institutions
Intervene in Foreign Exchange Rate Market
Lender of Last Resort
Check Clearing Process
Fractional Reserve Banking
• Reserves- deposits held by district banks
Types of Reserves
• Legal Reserves- deposits allowed to
legally be held
• Required Reserves- Amount set by Board
of Governors
• Excess Reserves- difference between
legal and required reserves
• Required Reserve Ratio-% of total
deposits Fed requires member banks to
hold
Bank’s Balance Sheet
• Assets
– Total Reserves
• Required
• Excess
– Loans
• Liabilities
– Checkable Deposits
– Page 366-372
Open Market Operations
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http://static.seekingalpha.com/uploads/2008/12/21/saupload_clipboard01_8.jpg
• Quantitative Easing
The FOMC
• Board of Governors + 5 Reserve Bank Presidents
• If the “FED” buys government securities from banks
then a banks total reserves increase allowing the
bank to loan out more money (Expansionary)
• If the “FED” sells government securities from banks
then a banks total reserves decrease forcing the
bank to loan out less money (Contractionary)
The Money Multiplier: Growing
Money
• Money Multiplier= 1/ required reserve ratio
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Actual Change in Money Supply = money multiplier * change in total
reserves
The Discount Rate
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The most transparent of FED actions
The FED acting as a lender of last resort
Difference between discount and federal funds rate
Rate agreed upon every 6 weeks by the board of
governors led by Chairman Ben Bernanke
Monetary Tools
• Methods used to implement monetary policy
• Required Reserve Ratio
• Changing the Discount Rate
• Buying/Selling Government Securities
Expansionary Policy
Contractionary Policy
Impact of Expansionary Monetary
Policy on the Money Market
Equation of Exchange and the
Quantity Theory
• MV= PQ
• M= money held by non banking public
• V= velocity of money- # of times money unit is
spent see www.wheresgeorge.com
• P= price level
• Y= real gdp
Monetary Policy Websites
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http://www.federalreserveeducation.org/FRED/
(History and Structure- plus games!)
http://www.economicadventure.org/index.cfm
(Created by Boston Federal Reserve Bank)
http://www.ny.frb.org/education/fedchal.html
(The Fed Challenge)
http://www.frbsf.org/publications/federalreserve/monetar
y/index.html
• (The Fed explains monetary tools and policy)