Transcript Economics 2 Federal Reserve System

Economic Systems in the
United States
SOL GOVT.14 The student will demonstrate
knowledge of economic systems
SOL GOVT.15 The student will demonstrate
knowledge of the United States market
economy.
SOL GOVT. 16 The student will demonstrate
knowledge of the role of government in
Virginia and United States economies
Influence of Government
Policies on the Economy
Government
policies and
regulations may
speed up or slow
down economic
activity in the U.S.
Market Economy
How the U.S. Government
Influences Economic Activity
Two major methods for implementing
Macroeconomic Policy
(branch of economics which deals with the
performance, structure, behavior and
decision-making of the whole economy)
*Fiscal Policy
*Monetary Policy
Fiscal Policy
Two main “instruments”:
1. Changes in government
expenditures (changes
in the amount of $$
government spends)
2. The level and type of
taxation it imposes
Monetary
Policy
The control of the nation’s
money supply and set interest
rates to promote economic
growth and stability
Role of the
Federal Reserve
System
“The FED”
The central banking system of the United States
since 1913 which oversees monetary policy
Two key objectives, known as the “Dual Mandate”:
1. Stable prices (low inflation rate)
2. Maximum employment (low
unemployment rate)
Banking System Foundation
Fractional-Reserve Banking: banks
only required to hold a fraction of
their depositors money in reserve
*Banks invest the majority of their customers
money-when too many depositors withdrew their
money at same time a bank run can result
*The Fed is the lender of last resort to bail them
out, but can lead to moral hazard as risk is shifted
to the Fed
What does the
FED do?
• Supervise banks through
rules/regulations
• Provide financial services to banks
• Control the money supply
Fed’s Central Banking Responsibilities
The Government’s bank processes trillions of
dollars of financial transactions!
*U.S. Treasury’s checking account is with the
Fed
*Handles incoming federal tax deposits and
outgoing government payments
*Sells U.S. government securities (savings
bonds, Treasury bills)
*Issues the nation’s coin and paper currency
(but doesn’t print it: Treasury’s B.E.P. does)
Bureau of Engraving and Printing
• 1861: The first general circulation of paper money
(Greenbacks) by the federal government occurs due to the
financial demands of the Civil War.
• 1865: The Secret Service is established as a bureau of the
Treasury for the purpose of deterring counterfeiters.
• 1934: $100,000 bill issued (largest denomination ever)
• 1957: In God We Trust added to $1 bills (1864 on 2 cent
coin)
• 1969: The Treasury Secretary announces that currency
in denominations larger than $100 will no longer be issued
$500, $1,000, $5,000,
and $10,000 were
discontinued immediately
Bureau of
Engraving and
Printing
• Fiscal Year 2014: BEP printed 25 million notes per
day with a face value of $560 million!
• 7.8 billion notes printed in 2013 costing 10 cents per
note (1.8B $1, 4.8M $5; $4.5B $100)
• 90% to replace notes taken out of circulation
• 8.9 tons of ink used each day in Washington DC and
Fort Worth, Texas facilities
Tools for Monetary Policy
Discount Rate: interest rate charged to
commercial banks on loans they receive from
the Fed
Reserve Requirement: amount of money a bank
is required to hold in reserve against deposits
to avoid bank runs/panics
Open Market Operations (OMO): buying or
selling government bonds to control the
interest rate and supply of money in the
economy (now buying $85 BILLION a month…)
Elastic
Currency
The fact that the Fed can manipulate
the supply of money in the economy
• Expansionary (print more money) to combat
unemployment in a recession, by lowering
interest rates to entice businesses to expand
• Contractionary reduce
the money supply to
slow inflation
Fungibility
• Property of a good or commodity whereby
it is capable of mutual substitution
• A $50 bill is – a car isn’t (but the gas in it is!)
The Fed trades in “fungible securities”
Structure of the Fed
Federal Reserve
Board of Governors
• Chaired by Janet Yellen
for a 12 year term
Fed does not need most
of its decisions approved
by President or Congressthey are independent
Fed Chair
Janet Yellen
Federal Open
Market
Committee
(FOMC)
Responsible for setting U.S. monetary policy
and interest rates
*Consists of all 7 Fed Governors, and 12
regional Bank presidents
Very powerful committee!
Structure
of the Fed
12 Federal Reserve Districts
12 Regional Federal Reserve Banks located in
Boston, New York, Philadelphia, Cleveland,
Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Kansas City, Dallas,
San Francisco