1. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 1 Federal Reserve and Monetary Policy Federal Reserve System 14-1 Monetary Policy 14-2

2. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 2 L earning O bjectives 14-1 Federal Reserve System Understand the structure of the Federal Reserve System. LO1-1 Explain the functions of the Federal Reserve System. LO1-2

3. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 3 Vocabulary 14-1 Federal Reserve System Structure of the Federal Reserve System Federal Reserve Districts Board of Governors of the Federal Reserve System Federal Open Market Committee (FOMC) Federal Advisory Council (FAC) What a Federal Reserve Bank Does check clearing Federal Deposit Insurance Corporation (FDIC) Consumer Financial Protection Bureau (CFPB)

4. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 4 Structure of the Federal Reserve System Federal Reserve Districts are the 12 banking districts which are served by a Federal Reserve district bank. 14-1 Federal Reserve System Each Federal Reserve bank acts as a central bank for the private banks in its region. The United States is the only nation in the world to have 12 separate regional banks instead of a single central bank. In addition, 25 Federal Reserve branch banks are located throughout the country.

5. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 5 Structure of the Federal Reserve System The Board of Governors of the Federal Reserve System is the seven-member board that supervises the banking system of the United States. 14-1 Federal Reserve System Board members are appointed by the president and confirmed by the U.S. Senate. Their responsibility is to supervise and control the money supply and the banking system of the United States. They serve for one nonrenewable 14-year term. A 14-year term for Fed governors insulates the Fed from politics. These terms are staggered so one term expires every two years.

6. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 6 Structure of the Federal Reserve System The Federal Open Market Committee (FOMC) directs the buying and selling of U.S. government securities by the Fed. 14-1 Federal Reserve System The FOMC consists of the seven members of the Board of Governors and the president of the New York Federal Reserve Bank. Also, the presidents of four other Federal Reserve district banks are members. The FOMC meets to discuss trends in inflation, unemployment, growth rates, and other macro data.

7. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 7 Structure of the Federal Reserve System The Federal Advisory Council (FAC) is a 12-member board of bankers selected from each Federal Reserve District to advise on business and financial issues. 14-1 Federal Reserve System Each of the 12 Federal Reserve district banks selects one member each year. The council meets periodically to advise the Board of Governors.

8. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 8 Vocabulary CHECKPOINT Structure of the Federal Reserve System 14-1 Federal Reserve System Federal Reserve Districts Board of Governors of the Federal Reserve System Federal Open Market Committee (FOMC) Federal Advisory Council (FAC) How is the Federal Reserve System different from a government agency? Probably the biggest difference is that the Fed is independent and provides its own funding.

9. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 9 What a Federal Reserve Bank Does Check clearing is a Federal Reserve service that collects funds from a check writer’s bank and transfers them to the recipient’s bank. 14-1 Federal Reserve System The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures customer deposits up to a predetermined limit if a bank fails. Congress created the FDIC in 1933 in response to the huge number of bank failures during the Great Depression.

10. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 10 What a Federal Reserve Bank Does The Consumer Financial Protection Bureau (CFPB) is an independent bureau within the Federal Reserve that helps consumers make financial decisions. 14-1 Federal Reserve System The goal of the CFPB is to promote fairness and make mortgages, credit cards, and other consumer financial services understandable. The objective is to let consumers see clearly the costs and features of loans.

11. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 11 Vocabulary CHECKPOINT What a Federal Reserve Bank Does 14-1 Federal Reserve System check clearing Federal Deposit Insurance Corporation (FDIC) Consumer Financial Protection Bureau (CFPB) It is often said that the Federal Reserve prints money. Is this correct? Technically the Fed does not print money, but money is printed by the Bureau of Engraving under the Fed’s authority.

12. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 12 L earning O bjectives 14-2 Monetary Policy Analyze the three basic tools used to implement U.S. monetary policy. LO2-1 Explain how monetary policy affects the economy. LO2-2

13. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 13 Vocabulary 14-2 Monetary Policy How the Fed Changes the Money Supply monetary policy expansionary monetary policy contractionary monetary policy open market operations discount rate federal funds rate Monetary Policy Using the AD/AS Model

14. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 14 How the Fed Changes the Money Supply Monetary policy is the Federal Reserve’s use of changes in the money supply to achieve economic goals. 14-2 Monetary Policy Expansionary monetary policy uses an increase in the money supply to increase real GDP. Contractionary monetary policy uses a decrease in the money supply to decrease real GDP.

15. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 15 How the Fed Changes the Money Supply Open market operations is the buying and selling of government securities to affect the money supply. 14-2 Monetary Policy The discount rate is the interest rate the Fed charges on loans of reserve to banks. Changes in the discount rate often signal the Fed’s monetary policy direction. A lower rate encourages banks to borrow funds from the Fed and offer loans to the public at a lower interest rates. A higher rate means it will cost banks more to borrow from the Fed.

16. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 16 How the Fed Changes the Money Supply The federal funds rate is he interest rate one bank changes another for overnight loans of reserves. 14-2 Monetary Policy Reserves borrowed in the federal funds have no effect on the money supply. This is because such borrowing simply moves reserves from one bank to another. In practice, the Fed keeps the discount rate close to the federal funds rate. Also, the federal funds rate is a key barometer of Fed policy reported in the media.

17. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 17 Vocabulary CHECKPOINT How the Fed Changes the Money Supply 14-2 Monetary Policy monetary policy expansionary monetary policy contractionary monetary policy open market operations discount rate federal funds rate What authority does the president or members of Congress have over monetary policy? The Congress and President have no authority over monetary policy at the present although in theory they could pass a new law that would give them this power.

18. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 18 Monetary Policy Using the AD/AS Model The model is used to demonstrate expansionary and contractionary monetary policy. 14-2 Monetary Policy To encourage growth and reduce employment, the Fed can increase money supply and decrease interest rates. Lower interest rates encourage consumer s to borrow and spend more. To achieve price stability the Fed can use contractionary policy. The goal is to slow the growth rate for an “overheated” economy by decreasing the money supply and lowering interest rates.

19. © 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 14 19 Vocabulary CHECKPOINT Monetary Policy Using the AD/AS Model 14-2 Monetary Policy If there is a recession or a problem with inflation, should fiscal policy and monetary policy be used? In times of recession or inflation it is possible to try to solve the problem by implementing either fiscal policy or monetary policy, or both.