mon fed monetary policy

Short Quiz

1. Explain the meaning of the 3 functions of money2. Why is fiat currency scary?

3. If the minimum wage is increased, and fast food prices increase, which theory of inflation is at

work?4. If firms raise the prices of Seahawks gear after

Sunday’s game which theory of inflation is at work?

5. Calculate the inflation rate of fuel, if gas was $2 per gallon in 2005 and is $3 today.

Look carefully at your money

Money vocabulary

• Liquidity• Demand deposits • balances in bank accounts

that depositors can access on demand by writing a check.

• Central Bank• Controlling bank of each

country, controls monetary policy

Types of money supply

The velocity of money (also called velocity of circulation) is the average frequency with which

a unit of money is spent in a specific period of time.

Without banks

• You would have to pay cash for the following items:

• College ($1500-3000/year)• New Cars $9000-35,000• Small Business Loans ($10,000+)• Houses ($140,000-300,000)

• Time would be spent counting and guarding your cash.

• Time saving + safety

What if the bank goes out of business?

• $250,000 per US account

How does the US banking system work?

Does the bank have to keep all the money you deposit on hand?

NO, fractional reserve system

What is a Credit Union then?• Smaller, regional, non-profit, theme based,

lower rates

Who regulates the banks?

• “The Fed”

• 1913

How does “the Fed” work?

Why is the Chairman of the Fed sometimes thought of as the “second most powerful man

in the US”?

• Monetary change:: increases the reserve rate

• Effect:

• Monetary change: lowers reserve rate

• Effect:

The Federal Reserve System

• The Structure of the Federal Reserve System: The primary elements in the Federal Reserve

System are:

1) The Board of Governors

2) The Regional Federal Reserve Banks

3) The Federal Open Market Committee

The Fed’s Organization

• The Fed is run by a Board of Governors, which has seven members appointed by the President and confirmed by the Senate.

• Among the seven members, the most important is the chairman. The chairman directs the Fed staff, presides over board meetings, and testifies about Fed policy in front of Congressional Committees.

• The Board of Governors Seven members Appointed by the President Confirmed by the Senate Serve staggered 14-year terms so that one comes

vacant every two years. President appoints a member as chairman to serve

a four-year term.

The Fed’s Organization

Who controls “the Fed”?

• The Federal Open Market Committee (FOMC) is made up of the following voting members:

The chairman and the other six members of the Board of Governors.

The president of the Federal Reserve Bank of New York.

The presidents of the other regional Federal Reserve banks (four vote on a yearly rotating basis).

The Fed’s Organization

The Fed’s Organization

The Federal Reserve Banks 12 District banks Nine directors

Three appointed by the Board of Governors. Six are elected by the commercial banks in the

district. The directors appoint the district president

which is approved by the Board of Governors.

The Federal Reserve System

The Federal Reserve Banks The New York Fed implements

some of the Fed’s most important policy decisions.

• The Federal Open Market Committee (FOMC) Serves as the main policy-making organ of the

Federal Reserve System. Meets approximately every six weeks to review

the economy.

The Fed’s Organization

What does “the Fed” do?

SuppliesMoney

Controls Moneysupply

SetsReserve

Requirements SuperviseBanks

Gov’t Accounting

ClearsChecks

THE FED

The Fed’s Organization

Monetary policy is conducted by the Federal Open Market Committee.

Open-Market Operations

• The money supply is the quantity of money available in the economy.

• The primary way in which the Fed changes the money supply is through open-market operations. The Fed purchases and sells U.S. government

bonds. DO AN EXAMPLE Contractionary vs. expansionary

Fed’s Tools

• Open market operations• Reserve Rate• Discount Rate

• Lender of last resort

Open-Market Operations

• To increase the money supply, the Fed buys government bonds from the public.

• To decrease the money supply, the Fed sells government bonds to the public.

Changing the Discount Rate

• The discount rate is the interest rate the Fed charges banks for loans. Increasing the discount rate decreases the money

supply. Decreasing the discount rate increases the money

supply.