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The Federal Reserve System & Monetary Policy

The Federal Reserve System & Monetary Policy

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Published by: anon-583057 on Oct 05, 2007
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CHAPTER 14

The Federal Reserve and Monetary Policy
SECTION 1: The Federal Reserve System SECTION 2: The Federal Reserve at Work SECTION 3: Monetary Policy Strategies

1

SECTION 1

The Federal Reserve System

Objectives:
 How did the Panic of 1907 affect U.S. banking?  What are the purposes and characteristics of the Federal Reserve System?  How is the Fed organized?

2

SECTION 1

The Federal Reserve System

Effects of the Panic of 1907 on U.S. banking:
 caused the collapse of many banks  endangered the monetary system  broke the resistance to central banking

3

SECTION 1

The Federal Reserve System

The Fed
 Roles:
 to supervise member banks  to hold cash reserves  to control circulation of money

 Features:
 lacks a single central bank  is owned and controlled by the member banks  makes membership optional for some banks
4

SECTION 1

The Federal Reserve System

Structure of the Fed
 National level:
 Board of Governors—highest policy-making body  Federal Open Market Committee—made up of the

Board of Governors, the Federal Reserve Bank of New York, and four other district bank members

 District level:
 12 Federal Reserve banks  25 branch offices  local member banks
5

SECTION 2 The Federal Reserve at Work

Objectives:
 What services does the Fed provide to banks?  How does the Fed serve the federal government?  How do economists measure the U.S. money supply?
6

SECTION 2 The Federal Reserve at Work

Services the Fed provides to banks:
 clearing checks  lending reserves to banks

7

SECTION 2 The Federal Reserve at Work

Services the Fed provides to the government:
 serves as the government’s bank  supervises the Fed’s member banks  regulates the national money supply

8

SECTION 2 The Federal Reserve at Work How economists measure the U.S. money supply:
 M1—counts all currency in circulation, the value of all traveler’s checks, all checking account deposits, and deposits in all similar accounts in banks  M2—money counted in M1, plus money in money market accounts, money market mutual fund shares, and other savings deposits  M3—money counted in M2, plus all large time deposits, repurchase agreements, and some Eurodollars
9

SECTION 3 Monetary Policy Strategies

Objectives:
 Why does the Fed rely on either an easymoney or a tight-money policy?  How does the Fed make monetary policy?  What are the challenges associated with determining monetary policy?

10

SECTION 3 Monetary Policy Strategies

Money policy
 Easy-money policy:
 to expand the money supply  to increase aggregate demand  to create jobs

 Tight-money policy:
 to slow business activity  to help stabilize prices  to restrict money supply  to reduce aggregate demand
11

SECTION 3 Monetary Policy Strategies

How the Fed makes monetary policy:
 open-market operations—buying and selling of government securities  discount rate—the interest rate that the Fed charges member banks for use of its reserves and which the Fed adjusts to encourage or discourage borrowing  reserve requirement—money that banks must hold in their vaults or accounts to meet demand requests

12

SECTION 3 Monetary Policy Strategies

Challenges associated with determining monetary policy:
 incorrect economic forecasts  time lags in enacting monetary policy  difficulties in establishing priorities and trade-offs  lack of coordination among government agencies
13

CHAPTER 14

Wrap-Up
1. How does the organization of the Federal Reserve System avoid placing too much power in a single bank? 2. Why is the Fed considered a “lender of last resort”? 3. How does the Fed put monetary policy to work? What are the characteristics of easy-money and tight-money policies? 4. What are the main difficulties the Federal Reserve encounters when developing monetary policy? 5. What tools does the Fed use to implement monetary policy?
14

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