1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

2 Chapter 27 The Federal Reserve System and Monetary Policy 9/17/2016 © ©1999 South-Western College Publishing

3 This chapter discusses principles associated with Countercyclical Monetary Policy © ©1999 South-Western College Publishing Money Supply vs. Interest Rate Targets Open Market Operations as a Tool of Monetary Policy The Discount Rate as a Tool of Monetary Policy Reserve Requirements as a Tool of Monetary Policy The Federal Reserve System as a Central Bank

4 What is a State Chartered Bank? A commercial bank that receives its charter to function from a state government and is subject to state laws © ©1999 South-Western College Publishing

5 What is a Nationally Chartered Bank? A commercial bank that receives its charter from the comptroller of the currency and is subject to federal law as well as the laws of its state © ©1999 South-Western College Publishing

6 When was our National Bank formed? After two unsuccessful starts in 1811 and 1816, our present central bank was established in 1864 and took its present form with the Federal Reserve Act 1913 © ©1999 South-Western College Publishing

7 What is the Federal Reserve System? The central bank and monetary authority of the United States; known as “the Fed” © ©1999 South-Western College Publishing

8 What is the function of the Fed? To ensure the availability of enough money and credit in the banking system to support a growing economy © ©1999 South-Western College Publishing

9 What are the goals of the Federal Reserve? high level of employment economic growth price stability stability in markets © ©1999 South-Western College Publishing

10 What are the responsibilities of the Fed? Influence our money supply Issue and maintain our currency Act as a national clearing house for checks Serve as a bank for the federal government © ©1999 South-Western College Publishing

11 Who owns the Fed? Each of the 12 district Federal Reserve banks is owned by its member banks © ©1999 South-Western College Publishing

12 What are the two types of banks? There are about 5,000 Nationally Chartered banks and about 6,000 State banks © ©1999 South-Western College Publishing

13 Are all banks members of the Federal Reserve? All nationally chartered banks and about 15% of state chartered banks are members of the Fed © ©1999 South-Western College Publishing

14 What percent of deposits reside in member banks? More than 50% of all deposits reside in member banks © ©1999 South-Western College Publishing

15 Why are some banks not members of the Federal Reserve? High minimum capital requirements Restrictions & regulations Can use Fed’s major facilities anyway © ©1999 South-Western College Publishing

16 Does the Fed loan money to private companies? No, they only do business with financial institutions © ©1999 South-Western College Publishing

17 Who makes the decisions for the Federal Reserve? The Board of Governors and the Open Market Committee © ©1999 South-Western College Publishing

18 How long do most Board Members serve? 14 years, after which they cannot be redesignated © ©1999 South-Western College Publishing

19 How long does the Chairman of the Board serve? The Chairman serves 4 years, but can be redesignated up to a total of 14 years © ©1999 South-Western College Publishing

20 What is the role of the Federal Open Market Committee? The FOMC makes decisions as to the buying and selling of government securities © ©1999 South-Western College Publishing

21 Who makes up the Federal Open Market Committee? The FOMC is made up of the 7 board members and 5 presidents of Federal Reserve Banks © ©1999 South-Western College Publishing

22 What is the Federal Advisory Council? Committee of 12 members, one from each Federal Reserve district who advise but do not vote © ©1999 South-Western College Publishing

23 President appoints Senate confirms Open Market CommitteeAdvisory Committee Board of Governors 12 Federal Reserve Banks National Banking System Commercial banks, Savings & Loans, Mutual savings banks, Credit Unions The Federal Reserve System © ©1999 South-Western College Publishing 23

24 Why would the Fed want to decrease the money supply? To lower inflation © ©1999 South-Western College Publishing

25 Why would the Fed want to increase the money supply? To stimulate employment © ©1999 South-Western College Publishing

26 How does the Fed influence the money supply? Reserve requirements Discount rate Federal funds rate Open market operations © ©1999 South-Western College Publishing

27 What are two ancillary tools of the Fed? Controlling stock market margin requirements Moral Suasion © ©1999 South-Western College Publishing

28 What are Reserve Requirements? All financial institutions have to keep a certain percentage of their liquid assets in reserve © ©1999 South-Western College Publishing

29 If we have inflation what will the Fed do to Reserve Requirements? Raise reserve requirements so that banks will have less money available to lend © ©1999 South-Western College Publishing

30 With unemployment what will the Fed do to Reserve Requirements? Lower requirements thereby increasing bank’s excess reserves so that banks will have more money to lend © ©1999 South-Western College Publishing

31 What is the Discount Rate? The interest rate that banks are charged when they borrow money from the Fed © ©1999 South-Western College Publishing

32 What will the Fed do to the discount rate during unemployment? The Fed will lower the discount rate © ©1999 South-Western College Publishing

33 What will the Fed do to the discount rate during periods of inflation? The Fed will raise the discount rate © ©1999 South-Western College Publishing

34 What is the Federal Funds Rate? The interest rate that one bank will charge another bank to borrow money © ©1999 South-Western College Publishing

35 What will the Fed do to the federal funds rate during unemployment? The Fed will lower the federal funds rate © ©1999 South-Western College Publishing

36 What will the Fed do to the federal funds rate during inflation? The Fed will raise the federal funds rate © ©1999 South-Western College Publishing

37 What is the Prime Interest Rate? The interest rate that big banks charge their best and most credit worthy customers © ©1999 South-Western College Publishing

38 What does the term Liquidity mean? A measure of the ease with which an asset can be converted into money without significant loss in its value © ©1999 South-Western College Publishing

39 What does Liquidity have to do with the money supply? With inflation, the Fed wants banks to be less liquid With unemployment, the Fed wants banks to be more liquid © ©1999 South-Western College Publishing

40 What makes a bank more or less liquid? A lot of cash in excess reserves - very liquid Little cash in excess reserves - less liquid © ©1999 South-Western College Publishing

41 What are Government Securities? Short term bonds sold by the federal government © ©1999 South-Western College Publishing

42 What are Open Market Operations? Purchases and sales of government securities by the Federal Reserve in an effort to influence the money supply © ©1999 South-Western College Publishing

43 What will the Fed do if we have unemployment? Buy government securities © ©1999 South-Western College Publishing

44 What will the Fed do if we have inflation? Sell government securities © ©1999 South-Western College Publishing

45 Which monetary tool is most often used? Open-market operations © ©1999 South-Western College Publishing

46 46 © ©1999 South-Western College Publishing /12/38.shtml cator/fomcsim.html tem/monpol/tofc.html

47 What is a State Chartered Bank?What is a State Chartered Bank? What is a Nationally Chartered Bank?What is a Nationally Chartered Bank? What is the Federal Reserve System?What is the Federal Reserve System? What are the responsibilities of the Fed?What are the responsibilities of the Fed? Who makes the decisions for the Federal Reserve?Who makes the decisions for the Federal Reserve?

48 What is the role of the Federal Open Market Committee?What is the role of the Federal Open Market Committee? Why would the Fed want to decrease the money supply?Why would the Fed want to decrease the money supply? Why would the Fed want to increase the money supply?Why would the Fed want to increase the money supply? How does the Fed influence the money supply?How does the Fed influence the money supply? Which monetary tool is most often used?Which monetary tool is most often used?

49 ENDEND © ©1999 South-Western College Publishing