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B. Basics about the Federal Reserve
OBJECTIVE 3
►
► LEARNING
Explain the functions of the Federal Reserve.
(Text pages 423-427)
1.
2.
The FEDERAL RESERVE SYSTEM
(“THE FED”) is the organization that
oversees the money supply of the
United States; it consists of five major
parts:
a. The Board of Governors administers and supervises the 12 Federal Reserve System banks.
i. Seven members are appointed by the President.
ii. The primary function is to set
monetary policy.
iii. MONETARY POLICY includes policies used by the
Federal Reserve to control
factors such as inflation, deflation, exchange rates, and
economic growth.
b. the 12 Federal Reserve Banks
c. three Advisory Councils
d. the member banks of the system
e. The Federal Open Market Committee has 12 voting members
and is the policy-making body.
Overseeing the monetary system
a. The FEDERAL OPEN MARKET
COMMITTEE (FOMC) is the
group that oversees the entire
Federal Reserve process.
i. The FOMC is the policymaking body of the FRS.
ii. The advisory councils give
13.1
POWERPOINT 13-5
Basics about the Federal
Reserve (Refers to text pages
423-427)
TEXT FIGURE 13.1
The 12 Federal Reserve
District Banks (Box in text
on page 424)
3.
13.2
suggestions to the board and
to the FOMC.
iii. The councils represent the
district banking districts, consumers, and member institutions.
b. The Federal Reserve:
i. Buys and sells foreign currencies;
ii. Regulates various types of
credit;
iii. Supervises banks;
iv. Collects data on the money
supply and other economic
activities.
c. The tools used to regulate the
money supply include:
i. reserve requirements;
ii. open-market operations;
iii. the discount rate.
The reserve requirement
a. A RESERVE is an amount of
money that must be kept on hand
and not lent to individuals or institutions.
i. The RESERVE REQUIREMENT is a percentage of
commercial bank’s checking
and savings accounts that
must be physically kept in this
bank.
ii. For example, cash in the vault
or a non-interest-bearing deposit at the local Federal Reserve district bank.
TEXT FIGURE 13.2
The Four Functions of the
Federal Reserve (Box in text
on page 424)
BONUS INTERNET
EXERCISE 13-2
Researching the Federal
Reserve Tools
This Internet exercise asks
the student to go online and
obtain up-to-date information
about the Fed’s money supply management tools. (See
complete exercise on page
13.Error! Bookmark not
defined. of this manual.)
TEXT FIGURE 13.3
How the Federal Reserve
Controls the Money Supply
(Box in text on page 427)
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
4.
iii. The reserve requirement for
U.S. banks is between 3-10%.
b. Changing the reserve requirement
is one of the Fed’s most powerful
tools.
c. When the Fed increases the reserve requirement:
i. Banks have less money for
loans and make fewer loans,
which reduces inflation.
ii. The money supply would be
reduced and prices would
likely fall.
d. When the Fed decreases the reserve requirement:
i. Banks have more money
available for loans and make
more loans.
ii. An increase in the money
supply stimulates the economy for higher growth, but it
can also create inflationary
pressures.
Open-market operations
a. Another commonly used tool is
OPEN-MARKET OPERATIONS,
the buying and selling of U.S.
government bonds.
b. When the Fed wants to decrease
the money supply, it sells government securities to the public.
c. When the Fed wants to increase
the money supply, it buys government securities from individuals, corporations, or organizations
willing to sell.
CHAPTER 13: Money, Financial Institutions, and Securities Markets
LECTURE LINK 13-7
Wrenching Inflation Out of
the Economy
The U.S. inflation rate in
1979 was almost 15%. Federal Reserve Chairman Paul
Volcker was appointed in
1980 with a mandate to bring
inflation under control. (See
complete lecture link on page
13.Error! Bookmark not
defined. of this manual.)
13.3
5.
The discount rate
a. The Fed is called the banker’s
bank.
i. Member banks can borrow
money from the Fed and then
pass it on to their customers.
ii. The DISCOUNT RATE is the
interest rate that Fed charges
for loans to member banks.
b. Increasing the discount rate discourages banks from borrowing
and consequently reduces the
number of available loans, resulting in a decrease in the money
supply.
c. Lowering the discount rate encourages banks borrowing and increases the amount of funds
available for loans, resulting in an
increase in the money supply.
d. The Fed also sets the rate that
banks charge each other (the federal funds rate).
C. Global Exchange of Money
1. A falling dollar means that the amount
of goods and services you can buy
with a dollar goes down compared to
other currencies.
2. A rising dollar means that the amount
of goods and services you can buy with
a dollar goes up.
3. For example, a strong Canadian dollar
would drive up the cost of a vacation
to Canada.
4. What makes the dollar weak or strong
is the position of the U.S. economy
13.4
TEXT REFERENCE
Ethical Challenge: To
Return the Money or Not
(Box in text on page 427)
If an ATM machine incorrectly dispensed $200 to you
instead of the $100 on the
receipt, what would you do?
POWERPOINT 13-6
Global Exchange of Money
(Refers to text page 428)
BONUS INTERNET
EXERCISE 13-3
Currency Trading
This exercise asks the student
to research currency values
and calculate some currency
conversions. (See complete
exercise on page 13.Error!
Bookmark not defined. of
this manual.)
LECTURE LINK 13-8
Protecting Your Money
INTRODUCTION TO BUSINESS: Instructor’s Resource Manual
5.
relative to other economies.
a. In a strong economy, the demand
for dollars is high and the value of
the dollar rises.
b. When the country’s economy is
perceived as weakening, the demand for the dollar declines and
the value falls.
When the dollar is weak compared to
other currencies:
a. It takes more dollars to buy factory
equipment from France, for example.
b. Companies are then not able to
trade as much.
c. Foreign competitors can use the
weaker dollar to their advantage.
SELF CHECK QUESTIONS (Text page 429)
1.
Explain the meaning of the money supply.
2.
What are the three ways in which the Federal Reserve
can control the money supply?
Why is control of the money supply important?
3.
4.
What does it mean if a news report says, “the dollar is
falling against the euro”?
CHAPTER 13: Money, Financial Institutions, and Securities Markets
After the Great Depression in
the 1930s, several organizations were created to protect
depositors and investors from
being completely wiped out
during an economic downturn. (See complete lecture
link on page 13.Error!
Bookmark not defined. of
this manual.)
CRITICAL THINKING
EXERCISE 13-3
Financing Options
A small company is considering expansion. Which financing option would be
best? (See complete exercise
on page 13.Error!
Bookmark not defined. of
this manual.)
BONUS CASE 13-3
State Farm Bank: Would
You Like Banking with
That Insurance? (Video
Case)
This bonus case ties in with
the video available for use
with this chapter. State Farm
Bank is a new type of financial institution: a virtual
bank. (See complete case,
discussion questions, and
suggested answers on page
13.Error! Bookmark not
defined. of this manual.)
13.5