1. Federal Reserve and Central Banking

2. Mr. Clifford
Mr. Clifford

3. The Federal Reserve
The Federal Reserve is the central bank of the United States
A central bank is an institution that oversees and regulates the banking system as well as control the money supply

4. The Federal Reserve
The Reserve System is made up of 12 privately owned District Federal Reserve Banks and a government system that oversees it (the Board of Governors)
The Treasury prints bills, the Federal Reserve puts the bills into circulation/takes them out

5. The Great Depression Out with the old ideas… …In with the new ideas
Laissez-faire
Inflation is the only problem
Gold standard
…In with the new ideas
National Banking Act created deposit insurance with the FDIC (Federal Deposit Insurance Corporation) and created the FOMC (Federal Open Market Committee) to conduct monetary policy
Glass-Steagall Act separated commercial and investment banks
This was repealed in 1999 because it drastically limited the interactions between the banks and the diversification of assets is a good thing

6. Basic Functions 1) Provides financial service for commercial banks
Holds reserves, provides cash, clears checks
2) Regulates banking institutions to ensure the soundness of the nation’s banking and financial system
3) Maintains the stability of the financial system
Provides liquidity to financial institutions
4) Conducts monetary policy
Prevents or addresses extreme fluctuations in the economy

7. Price Stabilization
One of the main goals of the Federal Reserve is to stabilize prices to help promote economic growth or prevent economic collapses
Their long-term effects on prices is strong, but in the short term they influence real output and real interest rates

8. Monetary Policy
Expansionary monetary policy = lower interest rates promote spending and investment which leads to increased employment (easy money)
It increases the supply of bank loans and makes them less expensive which increases aggregate demand, output and employment
Contractionary monetary policy = higher interest rates prevent inflation and promote price stability
It tightens the supply of money in order to reduce spending and control inflation (tight money)

9. Mr. Clifford
Mr. Clifford

10. EMP 1) Buy securities to increase commercial bank reserves
A tradable financial asset of any kind
Debt securities = bonds, banknotes
Equity securities = stocks
2) Lower the reserve ratio
By lowering it, they change the required reserves into excess reserves
3) Lower the discount rate (also called the federal funds rate)
They can entice commercial banks to borrow more reserves from the Federal Reserve

11. Discount Rate?
The discount rate is the rate that commercial banks must pay to borrow from the Federal Reserve
When it’s cheaper, the banks borrow more reserves
When it’s more expensive, the banks borrow less

12. CMP 1) Sell securities 2) Increase the reserve ratio
Reduces commercial bank reserves
2) Increase the reserve ratio
Automatically removes excess reserves from banks
3) Raise the discount rate
Discourages commercial banks from borrowing from the Reserve in order to build up their reserves

13. Open Market Operations
OMOs = the Federal Reserve buys and sells U.S. Treasury bills
Through a transaction with commercial banks that changes the banks’ reserves
When the Fed buys Treasury bills, it increases banks’ reserves. When it sells Treasury bills, it decreases banks’ reserves
Changes in the money supply changes the equilibrium interest rates

14. Expansion Multiplier
Recap: the expansion multiplier = the excess reserves times the multiplier (the DEM)

15. Example
Let’s say there’s a $5,000 deposit into a bank with a 10% required reserve
The DEM is 1/0.1= 10
ASSETS__________________________LIABILITIES
Loans $4, Deposits $5,000
Reserves $500
EMS = $4,500 x 10 = $45,000

16. Game Time!
Federal Reserve Game