THE FEDERAL RESERVE BANK THE CENTRAL BANK OF THE UNITED STATES THE LENDER OF LAST RESORT

THE FEDERAL RESERVE 1. The Federal Reserve was established in what year? What President? 1913 President Woodrow Wilson

2. What are its duties today? Maintain stable and secure financial system Conduct monetary policy Supervise and regulate the banking institutions Maintain stability of Financial Systems Provide Financial Services to depository institutions, US Govt., and Foreign Institutions

3. Describe its two part structure – Central Authority = Board of Governorts De-Centralized network of 12 Regional Banks (one in Cleveland)

4. How is the Fed insulated from political pressure? Its policies and operations do NOT require approval from Congress or President It finances itself Congress CAN change laws to affect the Fed. Res. The Fed does report to Congress

5. “…the Fed is commonly described as “independent……………………………………………..” With in the government 6. Congress has mandated two policy goals for the Fed – list them To have maximum sustainable output and employment To stabilize prices (low but stable inflation)

7. Define the Federal Funds rate – The interest rate that financial institutions charge when they borrow from each other Simple terms : Banks borrow from banks and pay an interest rate called…FFR

8. How does the Federal Funds rate influence the rest of the economy? It serves as a “benchmark” or signal for most other interest rates in the economy. If it is cheaper for banks to borrow from each other…..then……they … Will make it cheaper for people to borrow ….. As all other interest rates go down….more people borrow and spend and the economy EXPANDS

9. Define the Open Market Operations The Fed. buys and sells US Govt Bonds (on the open market) If the Fed buys bonds….it creates more money supply and the FFR decreases…..Expansionary Policy If the Fed sells bonds….it creates less money supply and the FFR Increases…..Contractionary Policy

10. Finish this quote ….”if the FOMC raises its target for the federal funds rate, then…..” ….they will SELL Bonds……which ….. Decreases the money supply…..which…. Raises the FFR… which……. Makes it more expensive for banks to borrow……which Means the banks will raise their interest rates for consumers to borrow…..which….. Means……..less spending……lower money supply….. = Contractionary monetary policy

Expansionary Policy = The Fed will buy bonds Fed buys $1000 bond from Joe. So the money supply ….. Increased. Joe gave up his bond but now has $1000 in cash So there will be more …. Spending And the economy will ….. Expand

11. Define the Discount Rate – The interest rate the Federal Reserve charges if commercial banks need to borrow directly from the Fed. “Lender of Last Resort” If the Fed raises the discount rate…..then More expensive for banks to borrow……which Means the banks will raise their interest rates for consumers to borrow…..which….. Means……..less spending……lower money supply….. = Contractionary monetary policy

Expansionary Monetary Policy Using the Discount Rate If the Fed lowers DR, it is cheaper for….. banks to borrow money . So banks will pass on savings to customers by…. Lowering their interest rates More borrowing and spending And the money supply will…. Increase The economy expands

12. Define Reserve Requirements - All banks must have a certain % of their deposits held as reserves. Why do you think this is ? This directly affects how much money could be loaned out by the commercial banks at one time. If the Fed raises the Reserve Requirement Means……..less the banks can loan out = less the consumers can borrow….= less consumers can spend Contractionary monetary policy

Expansionary Monetary Policy Using Reserve Requirement If the Fed decreased the Reserve Requirement, then banks would be allowed to…… Loan out more money. The Money supply would…. Increase. Consumers would …. Borrow more and spend more and the economy would……. Expand (grow)