mon fed monetary policy
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Short Quiz
1. Explain the meaning of the 3 functions of money2. Why is fiat currency scary?
3. If the minimum wage is increased, and fast food prices increase, which theory of inflation is at
work?4. If firms raise the prices of Seahawks gear after
Sunday’s game which theory of inflation is at work?
5. Calculate the inflation rate of fuel, if gas was $2 per gallon in 2005 and is $3 today.
Look carefully at your money
Money vocabulary
• Liquidity• Demand deposits • balances in bank accounts
that depositors can access on demand by writing a check.
• Central Bank• Controlling bank of each
country, controls monetary policy
Types of money supply
The velocity of money (also called velocity of circulation) is the average frequency with which
a unit of money is spent in a specific period of time.
Without banks
• You would have to pay cash for the following items:
• College ($1500-3000/year)• New Cars $9000-35,000• Small Business Loans ($10,000+)• Houses ($140,000-300,000)
• Time would be spent counting and guarding your cash.
• Time saving + safety
What if the bank goes out of business?
• $250,000 per US account
How does the US banking system work?
Does the bank have to keep all the money you deposit on hand?
NO, fractional reserve system
What is a Credit Union then?• Smaller, regional, non-profit, theme based,
lower rates
Who regulates the banks?
• “The Fed”
• 1913
How does “the Fed” work?
Why is the Chairman of the Fed sometimes thought of as the “second most powerful man
in the US”?
• Monetary change:: increases the reserve rate
• Effect:
• Monetary change: lowers reserve rate
• Effect:
The Federal Reserve System
• The Structure of the Federal Reserve System: The primary elements in the Federal Reserve
System are:
1) The Board of Governors
2) The Regional Federal Reserve Banks
3) The Federal Open Market Committee
The Fed’s Organization
• The Fed is run by a Board of Governors, which has seven members appointed by the President and confirmed by the Senate.
• Among the seven members, the most important is the chairman. The chairman directs the Fed staff, presides over board meetings, and testifies about Fed policy in front of Congressional Committees.
• The Board of Governors Seven members Appointed by the President Confirmed by the Senate Serve staggered 14-year terms so that one comes
vacant every two years. President appoints a member as chairman to serve
a four-year term.
The Fed’s Organization
Who controls “the Fed”?
• The Federal Open Market Committee (FOMC) is made up of the following voting members:
The chairman and the other six members of the Board of Governors.
The president of the Federal Reserve Bank of New York.
The presidents of the other regional Federal Reserve banks (four vote on a yearly rotating basis).
The Fed’s Organization
The Fed’s Organization
The Federal Reserve Banks 12 District banks Nine directors
Three appointed by the Board of Governors. Six are elected by the commercial banks in the
district. The directors appoint the district president
which is approved by the Board of Governors.
The Federal Reserve System
The Federal Reserve Banks The New York Fed implements
some of the Fed’s most important policy decisions.
• The Federal Open Market Committee (FOMC) Serves as the main policy-making organ of the
Federal Reserve System. Meets approximately every six weeks to review
the economy.
The Fed’s Organization
What does “the Fed” do?
SuppliesMoney
Controls Moneysupply
SetsReserve
Requirements SuperviseBanks
Gov’t Accounting
ClearsChecks
THE FED
The Fed’s Organization
Monetary policy is conducted by the Federal Open Market Committee.
Open-Market Operations
• The money supply is the quantity of money available in the economy.
• The primary way in which the Fed changes the money supply is through open-market operations. The Fed purchases and sells U.S. government
bonds. DO AN EXAMPLE Contractionary vs. expansionary
Fed’s Tools
• Open market operations• Reserve Rate• Discount Rate
• Lender of last resort
Open-Market Operations
• To increase the money supply, the Fed buys government bonds from the public.
• To decrease the money supply, the Fed sells government bonds to the public.
Changing the Discount Rate
• The discount rate is the interest rate the Fed charges banks for loans. Increasing the discount rate decreases the money
supply. Decreasing the discount rate increases the money
supply.