Chapter 15 - The Federal Reserve

Janet Yellen

Structure of the FED Board of Governors- 7 members appointed by the President and confirmed in the Senate with a SM vote They serve 14 year terms one appointment becomes vacant every two years for reasons of experience job is to supervise and regulate the FED FOMC (Federal Open Market Committee) - 7 members of the Board of governors and 5 presidents of member banks They decide monetary policy

12 FED Banks

Check-Clearing

Monetary Policy The expansion or contraction of the money supply to influence the cost and availability of credit In other words, how easy will money be available? Will fluctuate the availability of money based on economic factors (inflation, unemployment, GDP)

3 tools of monetary policy Changing the discount rate - the rate at which the FED lends money to members banks To raise it makes borrowing more expensive for banks and less likely for them to extend credit (money supply contracts) To lower it makes borrowing less expensive for banks and more likely for them to extend credit (money supply expands)

3 tools of Monetary Policy Open Market Operations- the buying and selling of US Treasury bonds When bonds are bought by the FED, checks written by the FED add to reserves, expanding the money supply When bonds are sold by the FED, checks written by buyers subtract from reserves, contracting the money supply

3 Tools of Monetary Supply Reserve Requirement- The percentage of customer deposits a bank must hold as cash in reserve (in their vaults) The FED can raise the R.R. (banks must hold a larger percentage of deposits as cash, reducing available funds to lend out; this contracts the money supply)

3 Tools of Monetary Policy The Fed can lower the R.R. (banks can hold a smaller percentage of customer deposits To find out total amount of money created with a single deposit, the equation is deposit amount X R.R.

Easy Money vs. Tight Money Policy Easy money policy is the expansion of the money supply by making credit less expensive to obtain Tight money policy is the contraction of the money supply by making credit more expensive to obtain

Other Monetary Policy Tools Moral suasion- communication between banks, the government, and citizens Selective Credit controls- rules on who can borrow money

All Content Created by DJ Cook