Chapter 4 the u.s. federal reserve and the creation of money

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Chapter 4 the u.s. federal reserve and the creation of money …

Chapter 4 the u.s. federal reserve and the creation of money
Foundations of Financial Markets and Institutions 4th edition 2009
Frank J. Fabozzi
Franco Modigliani
Frank J. Jones

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Transcript

  • 1. The U.S. Federal Reserve and the Creation of Money Chapter 4
  • 2. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall2 Central Banks and Their Purpose Monetary authority Reserve banks Many countries have central banks European Central Bank
  • 3. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall3 Functions of Central Banks Risk assessment Risks reduction Oversight of payment systems Crisis management
  • 4. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall4 The Federal Reserve System Board of Governors Federal Reserve Banks Member Banks Federal Open Market Committee
  • 5. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall5 Instruments of Monetary Policy Reserve Requirements Open Market Operations Open Market Repurchase Agreements Discount Rate
  • 6. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall6 Reserve Requirements Fractional Reserve Banking System Required reserve ratio Demand deposits Time deposits Total reserves Required reserves Excess reserves
  • 7. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall7 Open Market Operations Fed purchases and sales of government securities Fed purchases Increase excess reserves Increase new loans Increase money supply Fed sales Decrease excess reserves Decrease loans Decrease money supply
  • 8. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall8 Open Market Repurchase Agreements Repurchase Agreement Fed buys securities from a seller who agrees to repurchase them at a higher price Reverse Repurchase Agreement Fed sells securities and agrees to repurchase them at a higher price
  • 9. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall9 Discount Rate Rate charged on loans from the Fed’s discount window. Administratively set by Board of Governors An increase in the discount rate discourages banks from borrowing from the Fed A decrease in the discount rate encourages banks to borrow from the Fed
  • 10. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall10 Different Uses of Money Unit of Account Numeraire Medium of Exchange Currency and demand deposits Store of Value Time deposits
  • 11. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall11 Monetary Aggregates Monetary Base: Currency in circulation Currency and coins plus total reserves M1 Money Supply Currency plus demand deposits M2 Money Supply M1 plus short-term time deposits M3 Money Supply M2 plus long-term time deposits
  • 12. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall12 Money Multiplier Process by which changes in bank reserves generate larger changes in the money supply. Size of Multiplier Influenced by: Reserve requirement ratio Public’s demand for cash Banks’ willingness to make loans Level of interest Rates
  • 13. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall13 Annual Rates of Growth of Monetary Aggregates
  • 14. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall14 The Money Supply Process in an Open Economy Foreign Exchange Market Intervention The Fed’s purchase and sale of foreign currencies Purchase of foreign currencies Increases monetary base Reduces value of the U.S. currency Sale of foreign currencies Decreases monetary base Increases value of the U.S. currency
  • 15. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall15 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.