Economics Economics Chapter 16Chapter 16

The Federal Reserve & Monetary The Federal Reserve & Monetary PolicyPolicy

Structure of the Federal Structure of the Federal ReserveReserve

The Board of GovernorsThe Board of Governors The Chairman of the Fed (Bernake)The Chairman of the Fed (Bernake)

Federal Reserve DistrictsFederal Reserve Districts 12 each serving more than 1 state12 each serving more than 1 state

The Federal Open Market Committee The Federal Open Market Committee (FOMC)(FOMC) Includes the board and the districtsIncludes the board and the districts

Member BanksMember Banks

The Pyramid Structure The Pyramid Structure of the Federal Reserveof the Federal Reserve

Structure of the Federal Reserve System

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Federal Reserve DistrictsFederal Reserve Districts

What does the Fed do?What does the Fed do? Federal Government’s BankerFederal Government’s Banker

Deposits tax revenueDeposits tax revenue Issues paymentsIssues payments

Government Securities AuctionsGovernment Securities Auctions Treasury bills, bonds, etc.Treasury bills, bonds, etc.

Issuing CurrencyIssuing Currency To banks when they need cashTo banks when they need cash

Check ClearingCheck Clearing If you write a check, it goes through The If you write a check, it goes through The

FedFed

What does the Fed do?What does the Fed do? Supervising Lending PracticesSupervising Lending Practices

Makes sure banks are following lawMakes sure banks are following law Lender of Last ResortLender of Last Resort

Where the banks go to borrow moneyWhere the banks go to borrow money ReservesReserves

Tells banks how much to keep in the vaultTells banks how much to keep in the vault Bank ExaminationsBank Examinations

Audits, investigations of banksAudits, investigations of banks

Monetary Policy ToolsMonetary Policy Tools

Money CreationMoney Creation Through saving/investing incentivesThrough saving/investing incentives

Reserve RequirementsReserve Requirements How much the bank has to keep on handHow much the bank has to keep on hand

More=less lending=less consumer spendingMore=less lending=less consumer spending Less=more lending=more consumer spendingLess=more lending=more consumer spending

Monetary Policy ToolsMonetary Policy Tools

Discount RateDiscount Rate Rate for banks to borrow money to Rate for banks to borrow money to

lend to consumerslend to consumers Open Market OperationsOpen Market Operations

Buying and selling of government Buying and selling of government bondsbonds

Fiscal and Monetary Policy Tools

Fiscal policy toolsMonetary policy

tools

1.increasing government spending

2. cutting taxes

Expansionary tools

1.open market operations: bond purchases

2.decreasing the discount rate

3.decreasing reserve requirements

Contractionary tools

1.decreasing government spending

2. raising taxes

1.open market operations: bond sales

2. increasing the discount rate

3.increasing reserve requirements