1. Basic Finance The Federal Reserve5
An introduction to financial institutions, investments & Management
Eleventh Edition

2. The Role of The Federal Reserve
The U.S. central bank
Purpose: to control the supply of money to achieve
Stable prices
Full employment
Economic growth

3. Structure of the Federal Reserve
Board of Governors
Twelve district banks
Federal Open Market Committee (FOMC)

4. Structure of the Federal Reserve

5. Expansion of Money and Credit
Fractional reserve banking
Expansion (and contraction) of the money supply
Importance of excess reserves

6. Reserve Requirement
Percentage banks must hold against deposit liabilities
Changing commercial banks' reserves leads to:
Multiple expansion or
Multiple contraction

7. Multiple Expansion Reserves are either Process of loan credition
Required or
Excess
Process of loan credition

8. Multiple Epansion of the Supply of Money

9. Multiple Expansion
Change in the money supply = change in excess reserves / reserve requirement

10. Multiple Expansion Reserve requirement = 10% Reserves increase by $100
Possible increase in the money supply: $100/0.1 = $1,000

11. Impact of Cash Withdrawals
Multiple expansion in reverse
Money supply contracts

12. Importance of the Federal Funds Market
Market for reserves
Lending reserves between banks
Federal funds rate

13. Discount Rate
Rate the Federal Reserve charges banks to borrow reserves

14. Target Federal Funds Rate
Fed establishes a target rate
Fed uses open market operations to achieve target rate

15. Multiple Contraction in the Supply of Money

16. Open Market Operations
Buying and selling Federal government securities
By far the most important tool of monetary policy

17. Open Market Operations: Monetary Expansion
To expand the money supply, the Fed buys government securities
Paying for the securities puts reserves into the banking system
Purchases reduce interest rates

18. Open Market Operations: Monetary Contraction
To contract the money supply, the Fed sells government securities
Receiving payment for the securities removes reserves from the banking system
Sales increase interest rates

19. The federal government's
Fiscal Policy
The federal government's
taxation
spending
debt management

20. The possible impact of deficit spending or a surplus on
Fiscal Policy
The possible impact of deficit spending or a surplus on
the money supply
reserves of the banking system
securities prices

21. Fiscal Policy Deficit: Government spending exceeds revenues
Surplus: Government revenues exceeds spending

22. Deficit Spending Sources of funds to finance the deficit
commercial banks
non-bank public
Federal Reserve
foreign credit markets

23. Inflation General increase in prices Consumer Price Index (CPI)
measures the rate of inflation

24. Fight Inflation by Contracting the money supply Raising interest rates
Raising taxes

25. Deflation A general decline in prices Opposite impact from inflation
Unexpected deflation hurts debtors and helps creditors
Associated with higher levels of unemployment

26. Recession Increase in unemployment
Reduction in the nation’s level of output