AIM:How does the Federal Reserve handle monetary policy? Yr8Vghttps:// Yr8Vg Do Now: What is a bank and why do we have them? Motivation: Suppose you are setting up a school bank. What incentive will you offer so your classmates will use your bank? How will your bank make a profit--legally

Federal Reserve System Congress created in 1913 Strengthen and stabilize the nation’s banking and monetary system

the Fed 12 districts all national banks required to join Fed is owned by these “member banks” NOT the Fed. Gov’t

the Fed Board of Governors- 7 members, appointed by the President for 14 years (one member is chairman for 4 years) Federal Open Market Committee (FOMC)- 7 members of board plus 5 presidents of district banks

responsibilities of the Fed Monetary Policy Regulation of Banks Provide services to banks & federal government Deal with currency

3 major tools the Fed uses to conduct monetary policy HW: pg 248 # 2,3,4 264 # 2,3 275 # 2,4 All due Friday Quiz Friday Money, Gold, The Federal Reserve

easy money policy Increase money supply Interest rates fall- “cheap money” People buy more on credit encourages sales and production Stimulates the economy

tight money policy restricts money supply Interest rates are higher Consumers & businesses borrow and spend less Slows economic growth

1. Reserve Requirement Percentage of total deposits that banks must have on reserve Fed lowers the requirement, more money can be loaned out, money supply expands Fed raises the requirement, less money can be loaned out, money supply contracts

2. Open Market Operations Buying and selling of government securities Fed buys bonds, excess reserves are added to the system Fed sells bonds, checks written by buyers subtract from reserves

3. Discount Rate Interest Fed charges on loans to other financial institutions Fed lowers the rate, more banks borrow, money supply expands Fed raises the rate, fewer banks borrow, money supply contracts