Fig. 1 The Geography of the Federal Reserve System District boundaries State boundaries Reserve Bank cities Board of Governors of the Federal Reserve System Dallas Boston New York Washington San Francisco Kansas City Atlanta 12 9 10 11 8 6 5 7 4 3 2 1 St. Louis Chicago Richmond Cleveland Minneapolis Philadelphia Note: Both Alaska and Hawaii are in the Twelfth District

Fig. 2 The Structure of the Federal Reserve System Senate confirms Chair of Board of Governors 12 Federal Reserve District Banks Lend reserves Clear checks Provide currency 3,500 Member Banks Elect 6 directors of each Federal Reserve Bank Appoints 3 directors of each Federal Reserve Bank President appoints Federal Open Market Committee (7 Governors + 5 Reserve Bank Presidents) Conducts open market operations to control the money supply Board of Governors (7 members, including chair) Supervises and regulates member banks Supervises 12 Federal Reserve District Banks Sets reserve requirements and approves discount rate

Fig.3 The Money Demand Curve The money demand curve is drawn for a given real GDP and a given price level. Money ($ Billions) Interest Rate At an interest rate of 6 percent, $500 billion of money is demanded. E 6% If the interest rate drops to 3 percent, the quantity of money demanded increases to $800 billion. F 3% Md 500 800

Fig. 4 The Supply of Money Money ($ Billions) Interest Rate E 6% J 3% 500 700

Fig. 5 Money Market Equilibrium Money ($ Billions) Interest Rate 6% 9% 3% Ms At a higher interest rate, an excess supply of money causes the interest rate to fall. At the equilibrium interest rate of 6%, the public is content to hold the quantity of money it is actually holding. At a lower interest rate, an excess demand for money causes the interest rate to rise. E Md 300 500 800

Fig. 6 An Increase in the Money Supply At point E, the money market is in equilibrium at an interest rate of 6 percent. To lower the interest rate, the Fed could increase the money supply to $800 billion. Money ($ Billions) Interest Rate 6% 3% The excess supply of money (and excess demand for bonds) would cause bond prices to rise, and the interest rate to fall until a new equilibrium is established at point F with an interest rate of 3 percent. E F Md 500 800

Fig. 7 Monetary Policy and the Economy Interest Rate E 6% F 3% 500 800 Money ($ Billions) Spending on plant and equipment, housing, and durables ↑ r ↓ Total Spending ↑ GDP ↑

Fig. 8 Interest Rate Expectations Money ($ Billions) Interest Rate 5% 10% Ms E 500

Fig. 9 The Fed's Response to Changes in Money Demand Interest Rate 10% E E' 5% Money ($ Billions) 500 1,000

Fig. 10 The Fed's Response to Spending Shocks Interest Rate 7.5% H E 5% Md Money ($ Billions) 300 500

Fig. 10a The Fed in Action: 2001 (a) Money ($ Billions) Interest Rate 6.4% During 2001, the Fed repeatedly increased the money supply . . . 3.1% C $1,093 1,170

Fig. 10b The Fed in Action: 2001 (c) Money (M1) ($ Billions) 1,000 1,050 1,100 1,150 1,200 Aug. 2000 Dec. Apr. 2001 During 2001, the Fed repeatedly increased the money supply . . .

Fig. 10c The Fed in Action: 2001 (d) 5.0 4.0 6.0 Federal Funds Rate Percent 2.0 3.0 Aug. 2000 Dec. Apr. 2001 which caused the interest rate to drop.