Economics Chapter Fourteen.

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Presentation transcript:

Economics Chapter Fourteen

Open Market Operations The Fed buys and sells securities, usually government securities When the Fed buys securities the money supply expands, and i fall, assuming money demand remains constant. That would be from 5% to 4% i below.

Open Market Operations When the Fed sells securities the money supply contracts, and i rises, assuming money demand remains constant. That would be from 4% to 5% i below.

The Discount Rate This is the rate the Fed charges banks who borrow from the Fed itself. The Fed lends money from what is called the discount window, which is the lending facility at the Fed. The Fed charges what is called the Discount Rate for the loan.

Monetary Policy The Fed is in charge of Monetary Policy. Monetary Policy is the Fed manipulation of the money supply to influence short-term i rates and the available amount of credit.

Tools of Monetary Policy Sets the reserve ratio (r) Legal reserves = require reserves (r) + excess reserves r = the ratio of reserves to deposits Sets the discount rate Open market operation (the most popular)

Functions of the Fed 1. Monetary Policy(expansionary/contractionary) 2. Supervision & Regulation of Financial Institutions 3. Lender of Last Resort 4. Provides Banking Services to the Government 5. Issues Coin & Currency 6. Financial Services to Commercial Banks

Board of Governors 7 members Appointed by the President Approved by the Senate Headed by the Chairman (Alan Greenspan) *all governors have 14 year terms, except for the chairman who has a 4 year term

Policy Making Body of the Fed Federal Open Market Committee (FOMC) Members of the FOMC: Board of Governors (including the chair) The President of the NY Fed Four other Regional Bank Presidents (on a rotating basis)