Transcript The Federal Reserve and Monetary Policy

The Federal Reserve and
Monetary Policy
The
Federal Reserve Bank
serves as the CENTRAL
bank for the United States.
The Federal Reserve Bank is
commonly called “the Fed.”
The Fed
1.
SUPERVISES member
banks
2. HOLDS cash reserves
3. MOVES money into or
out of CIRCULATION.
Each
region has it’s own
Fed
This is so the national Fed
doesn’t have too much
power
There are 12 Feds (dollar
bills have the number of the
Fed they came from on it)
Fed Services
Check Clearing (40
Billion Checks are cleared
each year)
How it works:
1. I write a check for
$100 to Mega Sports
Supply in Austin, TX.
2.
Mega Sports
deposits the check into
their bank account at
the Texas National
Bank.
3.
Texas National adds
$100 to Mega Sports’
account and sends my
check to the Fed
district bank in
DALLAS.
4.
The Dallas district
bank transfers $100 to
THE TEXAS NATIONAL
BANK reserve account,
and sends the check to
the Atlanta Fed. Reserve
Bank.
5.
The ATL Fed. Reserve
Bank receives the check
and transfers $100 to the
DALLAS Federal Reserve
Bank, and then sends the
CHECK to my bank, First
Union.
6.
My bank receives the
check and transfers $100
from my account back to
the Federal Reserve Bank
in ATLANTA.
Services to the Gov’t:
1.
Serves as the
Government’s BANK
2. Supervises the Fed’s
MEMBER banks
3. Regulates the MONEY
SUPPLY
The
Fed regulates the
money supply so that it
can replace worn
currency, but also to
control the supply of
money in our nation for
economic reasons.
Types of Money:
M1=CURRENCY,
TRAVELER’S CHECKS,
and DEMAND deposits
Which
person has more
influence over the U.S.
economy?
George Bush
Ben Bernanke
Dick Cheney
Your economic teacher
All of Congress
Ben Bernanke
Bernanke
is the leader of
the United States
economy.
He supervises the Fed
and tells them what to
do.
Monetary Policy
The
plan to EXPAND or
CONTRACT the money
supply in order to
INFLUENCE the cost and
availability of CREDIT.
After
the Fed measures
the money supply in the
U.S., it decides to use
either EASY-MONEY
POLICY or TIGHT-MONEY
POLICY to correct certain
areas in our economy.
Easy-Money Policy
Lower
interest rates
INCREASES the money
supply and creates jobs
lowers UNEMPLOYMENT
and promotes economic
growth.
Tight-Money Policy
Raises
interest rates (makes
money TIGHT)
DECREASES the money
supply and slows business
activity to help stabilize
PRICES
3 Ways the Fed can control the
money supply:
1.
DISCOUNT RATE
2. OPEN MARKET
OPERATIONS
3. RESERVE
REQUIREMENT
Discount Rate
The
INTEREST rate the
Fed charges its MEMBER
banks for the use of its
RESERVES.
The
“prime
rate”(minimum interest
rate that banks charge
on LOANS to customers)
usually rises and falls as
the discount rate rises
and falls.
Lowering
the discount
rate encourages
BORROWING.
Borrowing encourages
SPENDING.
Encourages economic
GROWTH.
Open Market Operations
Open Market Operations
(the MAIN tool of the
Fed) is the buying and
selling of government
SECURITIES.
What it does
To
contract the money
supply, the Fed will SELL
securities to people. Because
people are “getting rid” of
their money at that time, the
money supply will SHRINK.
To
expand the money
supply, the Fed will BUY
securities back from people
and businesses. That puts
more money back into the
HANDS of consumers and
expands the money supply.
Reserve Requirement
The
money that MUST BE
HELD by banks (either in
their own vaults or in
their ACCOUNTS at the
district Federal Bank).
A
HIGH reserve
requirement (like
15%) requires that
banks must keep that
money and NOT loan it
out.
A
LOW reserve
requirement (2.5%)
allows banks to loan
out MORE money.
Lowering
the reserve
requirement encourages
BORROWING.
Borrowing encourages
SPENDING.
Encourages economic
GROWTH.
While
the Fed does use
the reserve requirement
tool to influence the
economy, the Fed does
not make frequent or
dramatic changes in the
reserve requirement.
That
would cause
INSTABILITY in the banking
system. The percentage
does change annually
according to a FORMULA
specified in the Monetary
Control Act of 1980.