The Federal Reserve System and Monetary Policy

1
The Federal Reserve System and Monetary Policy

• Section 1
• Organization and Function of the Federal Reserve
  System

2
Current Events Question

• Who was the previous Federal Reserve Chairman who
  was appointed by Ronald Reagan?
• For 500, Who did President Bush appoint to take
  over the current Federal Reserve Chairmans
  position?
• Alan Greenspan
• Ben Bernanke

3
I. Organization of the Federal Reserve System

• The Federal Reserve System was created by
  Congress in 1913 as the nations central banking
  org.
• The Fed is responsible for monetary policy.
• Monetary Policy involves changing the rate of
  growth of the supply of money in circulation in
  order to effect the cost and availability of
  credit.

4
Organization of the Federal Reserve System cont.
5
I. Organization of the Federal Reserve System

1. D. The Board of Governors oversees 12 district
   Federal Reserve banks and regulates activity of
   member banks and all other depository
   institutions.
2. 7 full time members appointed by the President w/
   approval from the Senate.
3. Pres. Chooses one to be the chairman. (Ben
   Bernanke)
4. Each member serves a 14 year term and cannot be
   re-appointed
5. E. The Federal Advisory council reports 4 times
   per year to the board of governors on general
   business conditions in the country.

6
I. Organization of the Federal Reserve System
cont.

• F. Federal Open Market Committee (FMOC)
• 12 members, who meet 8 times per year to
  decide the course of action that the FED should
  take to control the money supply. They decide to
  raise or lower interest rates.
• G. 12 Federal Reserve banks are set up as
  corporations owned by member banks.

7
12 Districts of the Federal Reserve
8
I. Organization of the Federal Reserve System
cont.

• H. Members Banks- all national banks, those that
  are chartered by the federal govt. must join the
  Federal Reserve System state chartered banks may
  join if they choose.
• I. All institutions that accept deposits from
  customers must keep reserves in their district
  Federal Reserve bank.

9
I. Organization of the Federal Reserve System
cont.

• Discussion Question
• Why do you think that members of the Board of
  Governors cannot be re-elected?
• This prevents the members from abusing their
  power or doing things to appease certain
  political leaders. Instead the members act in the
  best interest of the nations economy.

10
II. Functions of the Federal Reserve System cont.

• A. FRS has many functions, including check
  clearing, supervising member banks, holding
  reserves, and supplying paper currency.
• Check clearing-method by which a check that has
  been deposited in one institution is transferred
  to the issuers depository institution.
• B. Its most important function is to regulate the
  money supply. (amount of in circulation)
• C. The Fed sets standards for consumer
  protection, mainly truth-in-lending legislation.

11
Cooperative Learning Activity

• Students will be in groups of 3.
• Students will make a poster that has an
  illustration representing the organization of the
  Federal Reserve System.
• Use page 400 as a guide to set up your
  illustration.
• Your poster must include all of the branches of
  the FED and an explanation of what each branch
  does.
• Group members must assign tasks to themselves so
  that all are fully involved in the activity.

12
Closure

• What are the main branches of the FED?
• Fed Open Market Committee, Board of Governors,
  Federal Advisory Council, Federal Reserve Bank,
  Member Banks.
• Homework Stock Descriptions Two questions for
  Chapter 15 Test.

13
Section 2 Money Supply and the Economy

• Loose and Tight Money Policies
• Monetary policy involves changing the growth rate
  of the money supply in order to change the cost
  and availability of credit.
• Loose moneycredit is plentiful and inexpensive
  (encourages economic growth)
• Too much (loose)inflation

14
Section 2 Money Supply and the Economy cont.

• C. Tight moneycredit is in short supply and
  expensive.
• D. The goal of the monetary policy is to strike a
  balance between tight and loose money.
• Not enough (tight)
• Shrinking economy

15
Section 2 Money Supply and the Economy cont.

• LOOSE MONEY POLICY
• Borrowing is easy
• Consumers buy more
• Businesses expand
• More people are employed
• People spend
• INFLATION

• TIGHT MONEY POLICY
• Borrowing is difficult
• Consumers buy less
• Businesses postpone expansion
• Unemployment increases
• Production is reduced
• RECESSION

16
INFLATION ACTIVITY
17
II. Fractional Reserve Banking

• Many banks are required to keep a of their
  total deposits in cash reserves in their vaults
  or with the Fed. Res. Bank.
• This enables the bank to provide funds for the
  customers who might suddenly want to withdraw
  large amounts of from their accounts.
• Currently most banks required to reserve 10 of
  their checkable deposits and none on their
  interest-paying deposits.

18
III. Money Expansion

• Banks can use non-reserve deposits to create new
  money.
• Money banks lend and receive is usually spent or
  deposited in another bank who can also use the
  deposit to create new .
• This process is known as expansion of money.

19
Sect. III. Regulating the Money Supply

• Changing the Reserve Requirements
• The lower the of deposits in reserve, the more
  money available to loan out.
• Ex 1000 x 20 800 available to loan
• 1000 x 10 900 available to loan
• B. When the Fed raises its reserve requirements,
  banks can call in loans, sell off investments, or
  borrow from another bank (or the FED).

20
Sect. III. Regulating the Money Supply cont.

• Raising the reserve decreases the amount of in
  the economy and slows it down.
• D. Because of the extreme effect on the money
  supply, the Fed has not been raising the reserve
  recently

21
Question

• How might money expansion work differently
  without the requirement of reserves?

• Banks would be able to lend out or invest up to
  their entire deposits. This could lead to a
  quicker expansion of money. This could also make
  it difficult for people to suddenly withdraw
  large amounts of money.

22
Sect. III. Regulating the Money Supply cont.

• II. Changing the Discount Rate
• The Discount Rate is the interest rate the FED
  charges its member banks when they borrow money
  to meet the reserve.
• The Prime Rate is the interest rate banks charge
  to their best customers.
• Bank borrows at high discount rate, then they
  will raise their prime rate for their loans to
  offset the cost of borrowing from the FED.

23
Sect. III. Regulating the Money Supply cont.

• C. A higher discount rate means that member banks
  charge their customers higher interest, reducing
  the supply.
• D. The Federal Funds Rate is the interest rate
  charged by banks to each other for short term
  loans. (usually overnight)