Transcript Chapter 16 - TeacherWeb

Section 1: Jen Merithew & Leah Kleynowski
Section 2:Sarah Blamire & Mason Palissery
Section 3: Megan Ostrum & Aaron Napkora
Section 4: Megan Ostrum & Omar Abualburak
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Federal Reserve System
 Central bank of the United States
 Acts as the main spokesperson for the Country’s
monetary policy.
Monetary Policy: refers to the actions that the Fed
takes to influence the level of real GDP and the
rate of inflation in the economy
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First Bank of the United States
 Issued a single currency
 Reviewed banking practices and helped the
federal gov. carry out duties and powers
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Congress then established the Second Bank
of the United States in 1816
 Restore order in the monetary system
 People feared a central bank placed too much
power in the hands of the federal gov.
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Reserve: deposits that a bank keeps readily
available as opposed to lending them out
Reserve Requirements: the amount of
reserves banks are required to keep on hand.
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Federal Reserve Act 1913 – 2 issues of the
nation’s banking system needed to be
addressed
 Consumers and businesses needed greater access
to funds to encourage business expansion
 Banks needed a source of emergency cash to
prevent depositor panics that resulted in bank
runs
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The Federal Reserve System is privately
owned by the member banks themselves but
is publicly controlled by the federal gov
The Board of Governors
 Federal Reserve System is overseen by the Board
of Governors
 Headquarter in Washington D.C.
 7 governors appointed by the President
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All nationally chartered banks are required to
join the federal Reserve System
The remaining members are state chartered
banks that join voluntarily
Since 1980 all banks have equal access to Fed
Services

Federal Reserve Act divided the United States
into 12 Federal Districts
 1 Federal Reserve Bank is located in each district
 Each bank monitors and reports on economic and
banking conditions in its district
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(FOMC) Makes key monetary policy decisions
about interest rates and the growth supply of
the United States money supply.
Members of the Committee are drawn from
the Board of Governors and the 12 districts
Sarah Blamire & Mason Palissery
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Federal reserve serves as a banker for US
government
Maintains checking account for the Treasury
Department.
Uses checking account to process
government payments
Also serves as a financial agent for the
Treasury Department.
Sells, transfers and redeems securities

Only the federal government can issue
currency
 Treasury Department uses coins minted in the US
 District federal reserve banks use paper currency

Check clearing
 Process by which banks record who gives up
money and who brings money in when a customer
writes a check
 Federal government can clear checks using high
speed equipment

Supervising Lending Practices
 Monitors bank reserves in the banking system
 Each of the 12 banks send out bank examiners to
check up on lending
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Federal funds
 Banks lend money from reserve banks
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Federal funds rate
 Interest rate charged for the loans
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Banks can borrow from the federal reserve
Acts as lender of last resort by making
emergency loans to commercial banks
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Reserves
 Banks hold a fraction of funds in reserves and lend
remaining funds (charging interest on them)
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Bank Exams
 Examine banks to ensure each institution is
obeying laws
 Bank examiners can force banks to sell risky
investments or declare loans that won’t be repaid
as losses
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Definition
 The process by which money enters into
circulation

Money Creation = Printing new money
 Banks Create money
▪ Interest on loans
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Definition
 The fraction of deposits that banks are required to
keep in reserve
▪ Calculated as the ratio of reserves to deposits
 The federal Reserve ensures that the banks will
have enough funds
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Definition
 Used to determine how much new money can be
created with each demand deposit and added to
the money supply
▪ Initial cash deposit x 1 / RRR
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Definition
 Bank Reserves greater than the amount required
by the Federal Reserve
Reserve
Requirement
An increase in
reserve
requirement
causes banks to
increase reserves
Reserve
Requirements
A reduction in
reserve
requirements
causes banks
to decrease
reserves
Money Supply
Banks reduce
lending,
causing the
money supply
to contract
Money Supply
Banks
increase,
lending
causing the
money supply
to expand
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In the past, the Fed lowered or raised the
discount rate to increase or decrease the
money supply.
Today the discount rate is primarily used to
ensure that sufficient funds are available in
the economy.
Prime Rate- the rate of interest that banks
charge on short-term loans to their best
costumers
Money Supply
Bonds Circulating
Through bond sales,
the Fed removes
reserves from the
banking system.
Banks reduce
lending, causing
the money supply
to contract.
Bonds Circulating
The Fed’s purchase
of bonds increases
reserves in the
banking system.
Money Supply
Banks increase
lending, causing
the money supply
to expand.
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Definition
 The belief that the money supply is the most
important factor in macroeconomic performance
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Easy money policy- a monetary policy that
increases the money supply
Tight money policy- a monetary policy that
reduces the money supply
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If the supply of money in the economy is
higher, the price of the interest rate is lower.
(Vise Versa)
Interest rates and spending
 Important factor of spending
 LOWER INTEREST RATES = GREATER
INVESTMENTS BY BUSINESS FIRMS
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Monetary policy must be carefully timed
Goal: to reach stabilization within the
economy
Good Timing vs. Bad Timing
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Inside Lags- the time it takes to implement
monetary policy
Outside Lags- the time it takes for monetary
policy to have an effect.
How quickly does the economy self-correct?
 Economist estimates for the US economy range
from 2 to 6 years
 Policymakers could guide the economy back to
stable levels of output and prices
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Why did congress establish a second bank?
What were the two issues that the nation’s
banking system needs to address?
What is monetarism?
What is the difference of easy money policy
and tight money policy?
What is the goal when using monetary
policy?
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How does the Federal government break up
issuing the currency in the U.S?
What important regulation roles does the
federal government perform?
What is the Money Multiplier?
What happens when a reserve requirements
increase? What happens when they decrease?