Download Chapter 16: Monetary Policy

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Monetary Policy – actions the Fed takes to
influence the level of real GDP and the rate of
inflation in the economy
(The Fed = The Federal Reserve)
The Board of Governors
 Headquartered in Washington, D.C.
 7 members
 Appointed by President, confirmed by Senate
 Staggered terms of 14 years
 Why?
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Geographical restrictions
Chairman of the
Board
Appointed by
President,
confirmed by
Senate
4-year terms,
renewable
Alan Greenspan
was a notable
Chairman (took
office in 1987 2006)
Chairman of the Fed
until February 2014
•This is Ben
Bernanke.
•Does
anyone know
the newest
Chairman of
the Federal
Reserve?
Newest Chairperson of
the Fed!
•Janet Yellen
was sworn in
as Chair of
the Fed in
February
2014.
•She is the
first woman
to hold this
position!
In which district is Pittsburgh located?
Where is our district Fed bank, then?
Color your maps 
•12 federal reserve
districts
•One federal reserve
bank located in each
•Each monitors and
reports on economic
and banking
conditions in its
district
•Each bank has board
of nine directors that
represents many
groups’ interests
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All nationally chartered
banks are required to join
Federal Reserve System
Many state-chartered
banks join voluntarily
Approximately 4,000 Fed
member banks
FAC (Federal Advisory
Council) collects info
about each district and
reports to Board of
Governors
Makes key decisions
about interest rates
and growth of money
supply
 Meet 8 times a year
 Members come from
Board of Governors
and district reserve
bank presidents
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Serving Government
 Federal Government’s banker
 Government securities (bonds,
bills, and notes) selling
 Issuing currency

Check Clearing – how
banks record whose
account gives up money
and whose account
receives money
Supervising lending practices
▪ Monitors bank reserves to make
sure banks don’t lend out too
much money at one time
▪ Study proposed bank mergers to
make sure there is competition
▪ Enforce truth-in-lending laws –
must give full and accurate info
about loan terms
 Lender of Last Resort
▪ Usually, banks borrow from
each other to meet their
daily reserve requirement
(fed funds rate)
▪ Sometimes they need to
borrow from Federal
Reserve (discount rate)
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Reserves – fractions of
funds that banks have
to hold (can’t loan out
and earn interest)
 Banks report to Fed
about their reserves
daily
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Bank examinations
 Examiners make
unexpected bank visits
to make sure banks
aren’t being too risky
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The Fed considers M1,
M2, and M3 –
compares the money
supply to the demand
for money
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Factors that Affect
Demand for Money
 Cash needed on hand
 Interest rates
 Price levels in the
economy
 General level of income
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Stabilizing the
Economy
 Too much money in the
economy leads to
inflation
 Fed tries to increase MS
to match the growth in
demand for money
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Reserve Requirement Ratio
Rates (Fed Funds Rate and Discount Rate)
Open Market Operations
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The fraction of reserves that banks MUST
hold (what they cannot lend out)
If the Fed wants to increase the money
supply, they can lower this
 Would free up more money for them to lend out
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If the Fed wants to contract the money
supply, they can raise this.
 Would make banks hold on to more money and
able to lend out less.
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Both the fed funds rate and the discount rate
are the interest rates that BANKS must pay
to borrow money
 Fed funds rate – the rate banks pay to borrow
money from OTHER BANKS
 Discount rate – the rate banks pay to borrow
money from the Fed
 If the Fed wants to increase the money supply, they
will lower these rates so that banks can borrow
more money (and then lends out more money to
customers)
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The buying and selling of treasury securities
(Think savings bonds, war bonds, etc.)
If the Fed wants to increase the money
supply, they will BUY bonds from the public
(because this will put money in people’s
hands)
If the Fed wants to decrease the money
supply, they will SELL bonds to the public
(because this will take money out of people’s
hands)