The Federal Reserve (Review From Monday) The Federal Reserve (“Fed”) serves as the nation’s central bank, which is designed to oversee the banking system and regulate the quantity of money in the economy. The “Fed” is a privately owned institution, authorized in 1914 by Congress to ensure the health of the nation’s banking system.

The Fed’s Organization The Fed is run by its Board of Governors. Seven members appointed by the President of the United States. The Chairman of the Board is the most important position: presiding, directing, and testifying about Fed policy. She/He is appointed by the President.

The Fed’s Organization The Federal Reserve System is made up of the Federal Reserve Board in Washington, D.C. and twelve regional Federal Reserve Banks. Monetary policy is made by the Federal Open-Market Committee.

Three Primary Functions of the Fed Regulate the private banking industry to make sure banks follow federal laws intended to promote safe and sound banking practices. Act as a banker’s bank, making loans to other banks and as a lender of last resort. Control of the supply of money i.e. Monetary Policy.

Money Supply Changes by the Fed Open-Market Operations: The primary way in which the Fed changes the money supply done through the purchase and sale of U.S. government bonds with newly printed money. To increase the money supply, the Fed buys government bonds from the public. To decrease the money supply, the Fed sells government bonds to the public.

Fiscal and Monetary Policy Process Next, we will read aloud a handout on Fiscal and Monetary Policy and complete 4 review questions followed by a 30 question multiple choice quiz. Take out a separate sheet of paper and number your answers 1- 30. Just write the letter of the correct answer. We will review each correct answer.

Use the fiscal policy of taxes to solve a recession. 1. What should Congress do to taxes to change the aggregate demand? A. Increase Taxes B. Reduce taxes 2.How will this change in taxes affect consumers’ disposable income? A. Disposable income increases B. Disposable income is reduced

Use the fiscal policy of taxes to solve a recession. 3.What does Congress need to do to aggregate demand? A. Increase aggregate demand B. Reduce aggregate demand

Use the fiscal policy of taxes to solve a recession. 4.How will this change in disposable income affect consumer spending in the economy? A. Spending increases B. Spending is reduced

Use the fiscal policy of government spending to solve inflation. 5.What does Congress need to do to aggregate demand? A. Increase aggregate demand B. Reduce aggregate demand 6.What should Congress do to government spending to change the aggregate demand? A. Increase government spending B. Reduce government spending

Use the fiscal policy of government spending to solve inflation. 7.How will this change in aggregate demand affect firms’ production and employment of workers? A. Production and employment increase B. Production and employment fall

Use the fiscal policy of government spending to solve inflation. 8.How will this change in production and employment affect consumers’ disposable income? A. Disposable income increases B. Disposable income is reduced 9.How will this change in disposable income affect consumer spending in the economy? A. Spending increases B. Spending is reduced

Use the monetary policy of open market operations to solve a recession. 10. What does the Federal Reserve need to do to aggregate demand? A. Increase aggregate demand B. Reduce aggregate demand 11. What does the Fed need to do to the money supply to change the aggregate demand? A. Increase the money supply B. Reduce the money supply

Use the monetary policy of open market operations to solve a recession. 12.What should the Fed do to bonds to change the money supply? A. Buy bonds B. Sell bonds 13.How will this bond action affect the reserves available for loan at banks? A. Increase reserves B. Reduce reserves

Use the monetary policy of open market operations to solve a recession. 14.How will this change in the money supply affect interest rates? A. Increase interest rates B. Reduce interest rates 15.How will this change in interest rates affect the amount of money borrowed? A. Increase borrowing B. Reduce borrowing

Use the monetary policy of open market operations to solve a recession. 16.How will this change in borrowing affect consumer spending in the economy? A. Spending increases B. Spending is reduced

Use the monetary policy of the discount rate to solve inflation. 17.What does the Federal Reserve need to do to aggregate demand? A. Increase aggregate demand B. Reduce aggregate demand 18.What does the Fed need to do to the money supply to change the aggregate demand? A. Increase the money supply B. Reduce the money supply

Use the monetary policy of the discount rate to solve inflation. 19.What should the Fed do to the discount rate to change the money supply? A. Increase the discount rate B. Reduce the discount rate

Use the monetary policy of the discount rate to solve inflation. 20.How will this discount rate change affect the willingness of banks to borrow from the Fed and make reserves available for loan at banks? A. Increase reserves B. Reduce reserves 21.How will this change in the money supply affect interest rates? A. Increase interest rates B. Reduce interest rates

Use the monetary policy of the discount rate to solve inflation. 22.How will this change in interest rates affect the amount of money borrowed? A. Increase borrowing B. Reduce borrowing 23.How will this change in borrowing affect consumer spending in the economy? A. Spending increases B. Spending is reduced

Use the monetary policy of the reserve requirement to solve inflation. 24.What does the Federal Reserve need to do to aggregate demand? A. Increase aggregate demand B. Reduce aggregate demand 25.What does the Fed need to do to the money supply to change the aggregate demand? A. Increase the money supply B. Reduce the money supply

Use the monetary policy of the reserve requirement to solve inflation. 26.What should the Fed do to the reserve requirement to change the money supply? A. Increase the reserve requirement B. Reduce the reserve requirement 27.How will this reserve requirement change affect the reserves available for loan at banks? A. Increase reserves B. Reduce reserves

Use the monetary policy of the reserve requirement to solve inflation. 28.How will this change in the money supply affect interest rates? A. Increase interest rates B. Reduce interest rates 29.How will this change in interest rates affect the amount of money borrowed? A. Increase borrowing B. Reduce borrowing

Use the monetary policy of the reserve requirement to solve inflation. 30.How will this change in borrowing affect consumer spending in the economy? A. Spending increases B. Spending is reduced

Assessment Activity In 2001, the U.S. economy slipped into recession. The GDP dropped by more than a 1 percent annual rate in the third quarter, the inflation rate dropped to below a 2 percent annual rate in the fourth quarter, and the unemployment rate rose to 5.6 percent in the fourth quarter. As an economic advisor to the Congress and the Federal Reserve, what would you suggest U.S. Congress should do with its tools of fiscal policy, and what would you propose that the Fed do with its tools of monetary policy? Write a paragraph explaining your recommendations, being sure to describe how the tools will work to help improve aggregate demand.