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and its Macroeconomics – Chapter 16, Sections 1 & 2 Since the 1930’s our Government has been required to carry out policies to [1] growth / GDP maximize ___________ unemployment [2] minimize ___________ inflation [3] minimize ___________ There are two primary ways to accomplish these goals: [1] Fiscal ________ Policy Monetary Policy [2] __________ Fiscal Policy is carried out by .... Congress The (1) __________ & (2) _________ President Monetary Policy is carried out by our Central Bank – in the US called ... The Fed = The Federal Reserve System The Fed was established in 1913 & restructured in 1935 to ... [1] aide expansion of US businesses by supplying more cash, and [2] be a source of emergency cash in case of a panic 4 of 22 Structure of the Federal Reserve System 7-member Board of Governors (including Chair of Board) 12 District Reserve Banks 4000 private bank members who benefit from membership The Federal Reserve System is comprised of 12 regional banks with 25 branches. This man served as Chair of the Board for 18 years. Alan Greenspan _______________ This man was sworn in as our new Chair on Jan 31, 2006. Ben Bernanke _______________ The Fed is constantly monitoring the health of the USA economy. The Fed is owned by its 12-member government banks, NOT the USA ____________ high degree of independence. B/c Fed officials aren’t elected, the Fed most often acts with the best interests of the country in mind, unlike politicians who have to worry re-elected about being __________. Functions of the Fed: [1] to serve as the bank of the US Gov’t [2] to regulate its member banks [3] to serve as a lender of last resort for member banks 9 of 22 Functions of the Fed: [4] to issue new currency coins are minted at the US Mint part of the Dept of Treasury (gov’t) new paper currency is printed by the Fed and first issued by the Fed Reserve Banks Functions of the Fed: [5] to clear checks Functions of the Fed: [6] to set the supply of money in the economy [7] to set a key interest rate – the discount rate – the rate at which the Fed loans money to banks Banks we use are private businesses ... they set their own rates Our new car loan rates range from 6.74% to 13.74% APR. To obtain the lowest annual percentage rate, you must have excellent credit history, .... (Dec. 2008) Annual Percentage Rates (APR) As Low As .... New car 5.30% Used car (franchise dealer) 5.85% 13 of 22 but ... Used car (private party) 8.34% but ... the rate at which banks loan money to us is strongly impacted by the discount rate – the rate at which the Fed loans to private banks. $ discount rate – the rate at which the Fed loans to banks $ $ $ $ Fed Reserve Bank of New York $ $ federal funds rate – the rate at which banks loan to each other over night commercial paper – overnight loans between banks These decisions are made by the 14 members of the Federal Open Market Committee (FOMC). The FOMC meets 8 times per year at the Washington DC Fed. The Fed has 2 tools to carry out Monetary Policy to help control the economy [1] money set the supply of _______ discount set the ________ rate – the [2] interest rate at which they loan money to banks 16 of 22 Let’s say we’re suffering from terrible inflation (a bad inflation rate is >5 inflation ____%). The Fed uses it tool of setting money supply. The Fed will increase decrease money supply in order to drive prices down. Let’s say we’re suffering from high unemployment (our natural rate of 5 unemployment is 4 __ -- __%). The Fed uses it tool of setting the discount rate. The Fed will increase decrease the interest rate in order to get 18 of 22 consumers & investors to spend more money Let’s say we’re suffering from a recession (our average annual rate of GDP growth is 3 ___%). The Fed uses it tool of setting the discount rate. The Fed will increase decrease the interest rate in order to get consumers & investors to spend more money start Chapter 16, Section 1 & 2 notes Chapter 16, Sections 1 & 2 – The Fed & Monetary Policy ________(date) The Fed – The Federal Reserve System – is the USA’s central bank The Fed constantly monitors the economy & uses monetary policy to correct problems continue Chapter 16, Section 1 & 2 notes Functions of the Fed: [1] loan money to and regulate private banks [2] clear checks [3] print & issue new paper currency [4] set the money supply [5] set the discount rate – interest rate charged to private banks continue Chapter 16, Section 1 & 2 notes [1] Monetary Policy increase or decrease MS (money supply) MS inflation MS inflation [2] increase or decrease i (interest rate) i borrowing spending growth employment borrowing spending 22 of 22 growth employment i Once the Fed designs its “Federal Reserve Note” it is signed by the Treasurer of the U.S. Anna Escobedo Cabral – 42nd Treasurer of the USA Summer, 2007 Newly-designed “5” had not been released and she told us that it would be the color ________.