Transcript the federal reserve - Solon City Schools

THE FEDERAL RESERVE BANK
THE CENTRAL BANK OF THE UNITED STATES
THE LENDER OF LAST RESORT
THE FEDERAL RESERVE
• 1. The Federal Reserve was established in what year? What
President?
• 1913 President Woodrow Wilson
2. What are its duties today?
• Maintain stable and secure financial system
• Conduct monetary policy
• Supervise and regulate the banking institutions
• Maintain stability of Financial Systems
• Provide Financial Services to depository institutions, US Govt., and
Foreign Institutions
3. Describe its two part structure –
a. Central Authority = Board of Governorts
b. De-Centralized network of 12 Regional Banks (one in Cleveland)
4. How is the Fed insulated from political
pressure?
• Its policies and operations do NOT require approval from Congress or
President
• It finances itself
• Congress CAN change laws to affect the Fed. Res.
• The Fed does report to Congress
5. “…the Fed is commonly described as
“independent……………………………………………..”
• With in the government
• 6. Congress has mandated two policy goals for the Fed – list
them
• To have maximum sustainable output and employment
• To stabilize prices (low but stable inflation)
7. Define the Federal Funds rate –
• The interest rate that financial institutions charge when they borrow
from each other
• Simple terms :
• Banks borrow from banks and pay an interest rate called…FFR
8. How does the Federal Funds rate influence the
rest of the economy?
• It serves as a “benchmark” or signal for most other interest rates in
the economy.
• If it is cheaper for banks to borrow from each other…..then……they …
• Will make it cheaper for people to borrow …..
• As all other interest rates go down….more people borrow and spend
and the economy EXPANDS
9. Define the Open Market Operations
• The Fed. buys and sells US Govt Bonds (on the open market)
• If the Fed buys bonds….it creates more money supply and the FFR
decreases…..Expansionary Policy
• If the Fed sells bonds….it creates less money supply and the FFR
Increases…..Contractionary Policy
10. Finish this quote ….”if the FOMC raises its
target for the federal funds rate, then…..”
….they will SELL Bonds……which …..
Decreases the money supply…..which….
Raises the FFR… which…….
Makes it more expensive for banks to borrow……which
Means the banks will raise their interest rates for consumers to
borrow…..which…..
Means……..less spending……lower money supply….. =
Contractionary monetary policy
Expansionary Policy = The Fed will
buy bonds
- Fed buys $1000 bond from Joe. So the money supply
…..
- Increased.
- Joe gave up his bond but now has $1000 in cash
So there will be more ….
Spending
And the economy will …..
Expand
11. Define the Discount Rate –
• The interest rate the Federal Reserve charges if commercial banks
need to borrow directly from the Fed.
• “Lender of Last Resort”
• If the Fed raises the discount rate…..then
More expensive for banks to borrow……which
Means the banks will raise their interest rates for consumers to
borrow…..which…..
Means……..less spending……lower money supply….. =
Contractionary monetary policy
Expansionary Monetary Policy Using the
Discount Rate
• If the Fed lowers DR, it is cheaper for…..
• banks to borrow money .
• So banks will pass on savings to customers by….
• Lowering their interest rates
• More borrowing and spending
• And the money supply will….
• Increase
• The economy expands
12. Define Reserve Requirements All banks must have a certain % of their deposits held as reserves. Why
do you think this is ?
This directly affects how much money could be loaned out by the
commercial banks at one time.
If the Fed raises the Reserve Requirement
Means……..less the banks can loan out = less the consumers can
borrow….= less consumers can spend
Contractionary monetary policy
Expansionary Monetary Policy Using Reserve
Requirement
• If the Fed decreased the Reserve Requirement, then banks would be
allowed to……
• Loan out more money.
• The Money supply would….
• Increase. Consumers would ….
• Borrow more and spend more and the economy would…….
• Expand (grow)