Economics Chapter 16 The Federal Reserve & Monetary Policy

Structure of the Federal Reserve  The Board of Governors  The Chairman of the Fed (Bernake)  Federal Reserve Districts  12 each serving more than 1 state  The Federal Open Market Committee (FOMC)  Includes the board and the districts  Member Banks

The Pyramid Structure of the Federal Reserve Structure of the Federal Reserve System 12 District Reserve Banks Federal Open Market Committee 4,000 member banks and 25,000 other depository institutions Board of Governors

Federal Reserve Districts

What does the Fed do?  Federal Government’s Banker  Deposits tax revenue  Issues payments  Government Securities Auctions  Treasury bills, bonds, etc.  Issuing Currency  To banks when they need cash  Check Clearing  If you write a check, it goes through The Fed

What does the Fed do?  Supervising Lending Practices  Makes sure banks are following law  Lender of Last Resort  Where the banks go to borrow money  Reserves  Tells banks how much to keep in the vault  Bank Examinations  Audits, investigations of banks

Monetary Policy Tools  Money Creation  Through saving/investing incentives  Reserve Requirements  How much the bank has to keep on hand  More=less lending=less consumer spending  Less=more lending=more consumer spending

Monetary Policy Tools  Discount Rate  Rate for banks to borrow money to lend to consumers  Open Market Operations  Buying and selling of government bonds

Fiscal and Monetary Policy Tools Fiscal policy tools Monetary policy tools 1.increasing government spending 2. cutting taxes Expansionary tools 1.open market operations: bond purchases 2.decreasing the discount rate 3.decreasing reserve requirements Contractionary tools 1.decreasing government spending 2. raising taxes 1.open market operations: bond sales 2. increasing the discount rate 3.increasing reserve requirements