Download CH 14 - Kenston Local Schools

Chapter 14
Federal Reserve and
Monetary Policy
14-1 Federal Reserve System
14-2 Monetary Policy
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
1
Chapter 14
14-1
Federal Reserve System
Learning Objectives
LO1-1 Understand the structure of the Federal
Reserve System.
LO1-2 Explain the functions of the Federal Reserve System.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
2
Chapter 14
14-1
Federal Reserve System
Vocabulary
Structure of the Federal Reserve
System
Federal Reserve Districts
Board of Governors of the
Federal Reserve System
Federal Open Market
Committee (FOMC)
Federal Advisory Council (FAC)
What a Federal Reserve Bank Does
check clearing
Federal Deposit Insurance
Corporation (FDIC)
Consumer Financial
Protection Bureau (CFPB)
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
3
Chapter 14
Structure of the Federal Reserve System
Federal Reserve Districts are the 12 banking
districts which are served by a Federal Reserve
district bank.
 Each Federal Reserve bank acts as a central bank for
the private banks in its region.
 The United States is the only nation in the world to
have 12 separate regional banks instead of a single
central bank.
 In addition, 25 Federal Reserve branch banks are
located throughout the country.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-1 Federal Reserve System
4
Chapter 14
Structure of the Federal Reserve System
The Board of Governors of the Federal Reserve
System is the seven-member board that supervises
the banking system of the United States.
 Board members are appointed by the president and
confirmed by the U.S. Senate. Their responsibility is
to supervise and control the money supply and the
banking system of the United States.
 They serve for one nonrenewable 14-year term. A
14-year term for Fed governors insulates the Fed
from politics. These terms are staggered so one term
expires every two years.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-1 Federal Reserve System
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Chapter 14
Structure of the Federal Reserve System
The Federal Open Market Committee (FOMC)
directs the buying and selling of U.S. government
securities by the Fed.
 The FOMC consists of the seven members of the
Board of Governors and the president of the New
York Federal Reserve Bank. Also, the presidents of
four other Federal Reserve district banks are
members.
 The FOMC meets to discuss trends in inflation,
unemployment, growth rates, and other macro data.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-1 Federal Reserve System
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Chapter 14
Structure of the Federal Reserve System
The Federal Advisory Council (FAC) is a
12-member board of bankers selected from each
Federal Reserve District to advise on business and
financial issues.
 Each of the 12 Federal Reserve district banks selects
one member each year.
 The council meets periodically to advise the Board of
Governors.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-1 Federal Reserve System
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Chapter 14
Structure of the Federal Reserve System
Vocabulary
CHECKPOINT
How is the Federal Reserve
System different from a
government agency?
Federal Reserve Districts
Board of Governors of the
Federal Reserve System
Federal Open Market
Committee (FOMC)
Federal Advisory Council
(FAC)
Probably the biggest difference is that the Fed is independent and
provides its own funding.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-1 Federal Reserve System
8
Chapter 14
What a Federal Reserve Bank Does
Check clearing is a Federal Reserve service that
collects funds from a check writer’s bank and
transfers them to the recipient’s bank.
The Federal Deposit Insurance Corporation
(FDIC) is a government agency that insures
customer deposits up to a predetermined limit if a
bank fails.
 Congress created the FDIC in 1933 in response to the huge
number of bank failures during the Great Depression.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-1 Federal Reserve System
9
Chapter 14
What a Federal Reserve Bank Does
The Consumer Financial Protection Bureau
(CFPB) is an independent bureau within the Federal
Reserve that helps consumers make financial
decisions.
 The goal of the CFPB is to promote fairness and
make mortgages, credit cards, and other consumer
financial services understandable.
 The objective is to let consumers see clearly the costs
and features of loans.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-1 Federal Reserve System
10
Chapter 14
What a Federal Reserve Bank Does
Vocabulary
CHECKPOINT
It is often said that the
Federal Reserve prints
money. Is this correct?
check clearing
Federal Deposit Insurance
Corporation (FDIC)
Consumer Financial
Protection Bureau (CFPB)
Technically the Fed does not print money, but money is printed by the
Bureau of Engraving under the Fed’s authority.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-1 Federal Reserve System
11
Chapter 14
14-2
Monetary Policy
Learning Objectives
LO2-1 Analyze the three basic tools used to implement U.S.
monetary policy.
LO2-2 Explain how monetary policy affects the economy.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
12
Chapter 14
14-2
Monetary Policy
Vocabulary
How the Fed Changes the Money
Supply
monetary policy
expansionary monetary policy
contractionary monetary policy
open market operations
discount rate
federal funds rate
Monetary Policy Using the AD/AS
Model
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
13
Chapter 14
How the Fed Changes the Money Supply
Monetary policy is the Federal Reserve’s use
of changes in the money supply to achieve
economic goals.
Expansionary monetary policy uses an increase
in the money supply to increase real GDP.
Contractionary monetary policy uses a decrease
in the money supply to decrease real GDP.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-2 Monetary Policy
14
Chapter 14
How the Fed Changes the Money Supply
Open market operations is the buying and selling
of government securities to affect the money supply.
The discount rate is the interest rate the Fed charges
on loans of reserve to banks.
 Changes in the discount rate often signal the Fed’s
monetary policy direction. A lower rate encourages
banks to borrow funds from the Fed and offer loans to
the public at a lower interest rates. A higher rate means
it will cost banks more to borrow from the Fed.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-2 Monetary Policy
15
Chapter 14
How the Fed Changes the Money Supply
The federal funds rate is he interest rate one bank
changes another for overnight loans of reserves.
 Reserves borrowed in the federal funds have no effect
on the money supply. This is because such borrowing
simply moves reserves from one bank to another.
 In practice, the Fed keeps the discount rate close to
the federal funds rate. Also, the federal funds rate is a
key barometer of Fed policy reported in the media.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-2 Monetary Policy
16
Chapter 14
How the Fed Changes the Money Supply
Vocabulary
CHECKPOINT
What authority does the
president or members of
Congress have over
monetary policy?
monetary policy
expansionary monetary policy
contractionary monetary policy
open market operations
discount rate
federal funds rate
The Congress and President have no authority over monetary policy at
the present although in theory they could pass a new law that would
give them this power.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-2 Monetary Policy
17
Chapter 14
Monetary Policy Using the AD/AS Model
The model is used to demonstrate expansionary and
contractionary monetary policy.
 To encourage growth and reduce employment, the
Fed can increase money supply and decrease interest
rates. Lower interest rates encourage consumer s to
borrow and spend more.
 To achieve price stability the Fed can use
contractionary policy. The goal is to slow the growth
rate for an “overheated” economy by decreasing the
money supply and lowering interest rates.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-2 Monetary Policy
18
Chapter 14
Monetary Policy Using the AD/AS Model
Vocabulary
CHECKPOINT
If there is a recession or a
problem with inflation,
should fiscal policy and
monetary policy be used?
In times of recession or inflation it is possible to try to solve the problem
by implementing either fiscal policy or monetary policy, or both.
© 2013 Cengage Learning. All rights reserved. May not be scanned, copied
or duplicated, or posted to a publicly accessible website, in whole or in part.
14-2 Monetary Policy
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