the federal reserve system & monetary policy

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The Federal ReserveThe Federal Reserveand Monetary Policyand Monetary PolicySECTION 1: The Federal Reserve System

SECTION 2: The Federal Reserve at Work

SECTION 3: Monetary Policy Strategies

CHAPTER 14

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Objectives: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?

The Federal Reserve SystemThe Federal Reserve SystemSECTION 1

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Effects of the Panic of 1907 on U.S. Effects of the Panic of 1907 on U.S. banking:banking:caused the collapse of many banksendangered the monetary systembroke the resistance to central banking


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The FedThe FedRoles:

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


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Structure of the FedStructure of the FedNational 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


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Objectives: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?

The Federal Reserve at WorkThe Federal Reserve at Work

SECTION 2

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


SECTION 2

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


SECTION 2

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How economists measure the U.S. money supply: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


SECTION 2

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Objectives:Objectives:Why does the Fed rely on either an easy-

money or a tight-money policy?How does the Fed make monetary policy?What are the challenges associated with

determining monetary policy?

Monetary Policy StrategiesMonetary Policy Strategies

SECTION 3

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Money policyMoney 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


SECTION 3

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How the Fed makes monetary policy: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


SECTION 3

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Challenges associated with Challenges associated with determining monetary policy:determining monetary policy: incorrect economic forecasts time lags in enacting monetary policydifficulties in establishing priorities and

trade-offs lack of coordination among government

agencies


SECTION 3

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1.1. How does the organization of the Federal Reserve System avoid placing too much power in a single bank?

2.2. Why is the Fed considered a “lender of last resort”?3.3. How does the Fed put monetary policy to work?

What are the characteristics of easy-money and tight-money policies?

4.4. What are the main difficulties the Federal Reserve encounters when developing monetary policy?

5.5. What tools does the Fed use to implement monetary policy?

Wrap-UpWrap-Up

CHAPTER 14