1. Principles of Macroeconomics ECON 401 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” 卜安吉

2. Principles of Macroeconomics, Day 82 We have Covered this before! Chapter 29: Money Creation and the Fed Chapter 29: Money Creation and the Fed –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?

3. Principles of Macroeconomics, Day 83 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

4. Principles of Macroeconomics, Day 84 Three Tools of the Fed (CB) 1.Open Market Operations 2.Discount Rate 3.Reserve Requirement Bernanke, Chair Mishkin Kohn, Vice Chair Warsh Krosner Currently there are 5 Federal Reserve Board Governors:

5. Principles of Macroeconomics, Day 85 1. Open Market Operations Federal Open Market Committee (FOMC) Federal Open Market Committee (FOMC) –The 7 Board of Governors –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) which increases/decreases the interest rate (respectively). Buy and Sell U.S. Treasury Bills (Notes and Bonds too but mostly Bills) which increases/decreases the interest rate (respectively).

6. Principles of Macroeconomics, Day 86 2. 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.

7. Principles of Macroeconomics, Day 87 3. 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.

8. Principles of Macroeconomics, Day 88 The Federal Reserve System From Introduction to Financial Management (FIN 102) 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)

9. Principles of Macroeconomics, Day 89 The Fed: The Board of Governors

10. Principles of Macroeconomics, Day 810 The Fed: The Fed Banks The Twelve Federal Reserve Districts – The Fed Banks

11. Principles of Macroeconomics, Day 811 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?

12. Principles of Macroeconomics, Day 812 The Fed: The FOMC  2007 Members of the FOMC  Members Ben S. Bernanke, Board of Governors, Chairman Timothy F. Geithner, New York, Vice Chairman Charles L. Evans, Chicago Thomas M. Hoenig, Kansas City Donald L. Kohn, Board of Governors Randall S. Kroszner, Board of Governors Frederic S. Mishkin, Board of Governors William Poole, St. Louis Eric S. Rosengren, Boston Kevin M. Warsh, Board of Governors Ben S. Bernanke Timothy F. Geithner Charles L. Evans Thomas M. Hoenig Donald L. Kohn Randall S. Kroszner Frederic S. Mishkin William Poole Eric S. Rosengren Kevin M. Warsh Ben S. Bernanke Timothy F. Geithner Charles L. Evans Thomas M. Hoenig Donald L. Kohn Randall S. Kroszner Frederic S. Mishkin William Poole Eric S. Rosengren Kevin M. Warsh  Alternate Members Richard W. Fisher, Dallas Sandra Pianalto, Cleveland Charles I. Plosser, Philadelphia Gary H. Stern, Minneapolis Christine M. Cumming, First Vice President, New York Richard W. Fisher Sandra Pianalto Charles I. Plosser Gary H. Stern Christine M. Cumming Richard W. Fisher Sandra Pianalto Charles I. Plosser Gary H. Stern Christine M. Cumming Next Meeting: April 29, 2008.25% or.5%?

13. Principles of Macroeconomics, Day 813 The Fed: The Chairman Ben Bernanke Where is it today?

14. Principles of Macroeconomics, Day 814 Money Creation Know how banks create money through demand deposits (checking accounts) and how the money multiplier works. See Homeworks