Principles of Macroeconomics Fall 2010 Day 14 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” 卜安吉

October 28, 2010Principles of Macroeconomics, Day 142 Chapter 30: Money, Banking, and the Fed Know the functions: Know the functions: –Store of Value, Unit of account and medium of exchange Fiat Money versus Commodity Money Fiat Money versus Commodity Money M1 is made up of what three components? M1 is made up of what three components? –Currency in Circulation, Demand Deposits and travelers checks

October 28, 2010Principles of Macroeconomics, Day 143 The Fed What are the three components of the Fed organization? What are the three components of the Fed organization? –The Governors –The Federal Reserve Banks –The Federal Open Market Committee “The Fed” is the Central Bank (CB) of the U.S.A.

October 28, 2010Principles of Macroeconomics, Day 144 Three Tools of the Fed (CB) 1.Open Market Operations 2.Discount Rate 3.Reserve Requirement Bernanke, Chair Yellen, Vice Chair Warsh Duke Currently there are 6 Federal Reserve Board Governors: Tarullo Bloom Raskin

October 28, 2010Principles of Macroeconomics, Day Open Market Operations Federal Open Market Committee (FOMC) Federal Open Market Committee (FOMC) –The 7 Board of Governors (usually) –New York Fed Bank President –4 other Presidents of the 11 other Fed Banks Buy and Sell U.S. Treasury Bills (Notes and Bonds too but mostly Bills) Buy and Sell U.S. Treasury Bills (Notes and Bonds too but mostly Bills) –Their actions decrease/increase the interest rate (respectively). – called open market operations

October 28, 2010Principles of Macroeconomics, Day Required Reserve Ratio Set by the Governors – the Reserve Ratio is the percentage of checkable deposits that must be kept at the Federal Reserve District Bank in their District as cash. The effect is that the cash is not available for banks to loan out.

October 28, 2010Principles of Macroeconomics, Day Discount Window The Discount Window is not a physical place but means that commercial banks may borrow from the Fed at the Discount Rate. The Discount Window is not a physical place but means that commercial banks may borrow from the Fed at the Discount Rate.

October 28, 2010Principles of Macroeconomics, Day Discount Window  The “lender of last resort” function.  The legislation in 1913 created the Fed in 1914, not in the constitution.  Lending to banks was the central bank’s only role.

October 28, 2010Principles of Macroeconomics, Day 149 The Federal Reserve System The Board of Governors The Board of Governors The Fed Banks The Fed Banks The Federal Open Market Committee (FOMC) The Federal Open Market Committee (FOMC)

October 28, 2010Principles of Macroeconomics, Day 1410 The Fed: The Board of Governors

October 28, 2010Principles of Macroeconomics, Day 1411 The Fed: The Fed Banks The Twelve Federal Reserve Districts – The Fed Banks

October 28, 2010Principles of Macroeconomics, Day 1412 The Fed: The FOMC   The FOMC:   The Seven Governors, New York Fed President and 4 other Fed Presidents – 12 total members   Set Monetary Policy for the United States   In other words, the FOMC sets the “Federal Funds Rate” – The interest rate that banks borrow funds from each other   The “Fed Funds” rate determines the “Prime” rate or the interest rate that banks charge their “best” corporate customers   An Increase in the fed funds rate means borrowing is more “expensive.”   A decrease?

October 28, 2010Principles of Macroeconomics, Day 1413 The Fed: The FOMC 2009 Committee Members 2009 Committee Members –Ben S. Bernanke, Board of Governors, Chairman Ben S. BernankeBen S. Bernanke –William C. Dudley, New York, Vice Chairman William C. DudleyWilliam C. Dudley –Elizabeth A. Duke, Board of Governors Elizabeth A. DukeElizabeth A. Duke –Charles L. Evans, Chicago Charles L. EvansCharles L. Evans –Donald L. Kohn, Board of Governors Donald L. KohnDonald L. Kohn –Jeffrey M. Lacker, Richmond Jeffrey M. LackerJeffrey M. Lacker –Dennis P. Lockhart, Atlanta Dennis P. LockhartDennis P. Lockhart –Daniel K. Tarullo, Board of Governors –Daniel K. Tarullo, Board of Governors Daniel K. TarulloDaniel K. Tarullo –Kevin M. Warsh, Board of Governors Kevin M. WarshKevin M. Warsh –Janet L. Yellen, San Francisco –Janet L. Yellen, San Francisco Janet L. YellenJanet L. Yellen Alternate Members Alternate Members –James B. Bullard, St. Louis James B. BullardJames B. Bullard –Thomas M. Hoenig, Kansas City Thomas M. HoenigThomas M. Hoenig –Sandra Pianalto, Cleveland Sandra PianaltoSandra Pianalto –Eric S. Rosengren, Boston Eric S. RosengrenEric S. Rosengren –Christine M. Cumming, First Vice President, New York Christine M. CummingChristine M. Cumming Next Meeting: Nov. 2-3, 2010 still % ff rate?

October 28, 2010Principles of Macroeconomics, Day 1414 The Fed: The Chairman Ben Bernanke Where is it today?

October 28, 2010Principles of Macroeconomics, Day 1415 Money Creation Know how banks create money through demand deposits (checking accounts) and how the money multiplier works. Participation points (“Quiz”) in our last class.