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And the Federal Reserve<br />1<br />Monetary Policy<br />By Tami Bertelsen<br />
The Federal Reserve<br />2<br />Established in 1913 by Congress.<br />Consists of 12 regional Federal Reserve Banks, 24 br...
Primary Functions<br />3<br />Supply the economy with fiduciary currency – supervises the printing of currency<br />Provid...
Primary Functions<br />4<br />Supervise member banks<br />Act as a lender of last resort<br />Regulate the money supply <b...
Federal Reserve deposits<br />5<br />Legal reserves – funds that depository institutions are allowed to claim as reserves<...
Required Reserve Ratio<br />6<br />   The required reserve ratio is the percentage of total reserves that the Fed requires...
Balance sheet<br />7<br />The relationship between reserves and total deposits in depository institutions can be shown usi...
8<br />Example of a change in Balance Sheet  - Starting Point<br />By Tami Bertelsen<br />
9<br />Example of a change in Balance Sheet – Ending PointIf I write a check to you for $500,000, and you bank at Macroban...
Open Market Operations<br />The Fed can make a direct effect on the overall level of reserves.  The Fed buys and sells U.S...
Open Market Operations example<br />11<br />By Tami Bertelsen<br />
Money Multiplier<br />12<br />Actual change in money supply is equal to the actual money multiplier * change in excess res...
Discount rateis the interest rate that the Fed changes its Members for certain short-term loans.<br />Lowering the discoun...
The Fed can change the percentage of depositor’s money that commercial banks are required by the Fed to keep on deposit in...
To expand money supply (during deflationary periods)<br />15<br />1. Buy securities in the open market<br />2. Lower the d...
To tighten money supply (during inflationary periods)<br />16<br />1. Sell securities in the open market<br />2. Raise the...
Demand for Money<br />17<br />By Tami Bertelsen<br />
Demand for money curveInverse relationship between  the Interest rate and the Quantity of Money<br />18<br />By Tami Berte...
Money Supply CurveThe quantity of money is fixed at  a given time and is vertical. <br />19<br />By Tami Bertelsen<br />
Direct Effect <br />Indirect Effect<br />An increase in money supply leads directly to an increase in aggregate demand.<br...
Aggregate Demand <br />21<br />By Tami Bertelsen<br />
Shift in Aggregate Demand<br />22<br />By Tami Bertelsen<br />
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Monetary policy

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Monetary Policy in the United States

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  • Pyramid structure
  • 8 functions
  • 8 functions
  • Similar to accounting
  • This is set by the Fed
  • Standard simple balance sheet
  • Now the Fed can change macrobanks balance sheet as well as the money supply
  • Macrobank and Ecobank are sample banks
  • Relates to prior example
  • 2nd tool of the Fed
  • 3rd tool of the Fed.
  • Only if inflation is not a concern
  • Only if unemployment is not a concern.
  • 3 separate types of demand transactions and precautionary demand are stable. Asset demand changes with interest rate.
  • As IR goes up, Qm goes down.
  • As IR goes up, QM does not change
  • Direct- monetarists, Indirect – New Keynsians.
  • See textbook for more examples
  • See textbook for more details.
  • Transcript of "Monetary policy"

    1. 1. And the Federal Reserve<br />1<br />Monetary Policy<br />By Tami Bertelsen<br />
    2. 2. The Federal Reserve<br />2<br />Established in 1913 by Congress.<br />Consists of 12 regional Federal Reserve Banks, 24 branch banks and hundreds of national and state banks. <br />By Tami Bertelsen<br />
    3. 3. Primary Functions<br />3<br />Supply the economy with fiduciary currency – supervises the printing of currency<br />Provide a system for check collection and clearing<br />Hold depository institutions reserve and sets the reserve requirement<br />Act as the government’s fiscal agent – U.S. fiscal agent<br />By Tami Bertelsen<br />
    4. 4. Primary Functions<br />4<br />Supervise member banks<br />Act as a lender of last resort<br />Regulate the money supply <br />Intervene in foreign currency markets to stabilize the value of the dollar <br />By Tami Bertelsen<br />
    5. 5. Federal Reserve deposits<br />5<br />Legal reserves – funds that depository institutions are allowed to claim as reserves<br />Required Reserves – minimum amount of legal reserves. <br />Excess Reserves = legal reserves minus required reserves<br />By Tami Bertelsen<br />
    6. 6. Required Reserve Ratio<br />6<br /> The required reserve ratio is the percentage of total reserves that the Fed requires depository institutions to hold.<br />By Tami Bertelsen<br />
    7. 7. Balance sheet<br />7<br />The relationship between reserves and total deposits in depository institutions can be shown using a balance sheet.<br />Assets – what is owned<br />Liabilities – what is owed<br />Net worth = assets – liabilities<br />By Tami Bertelsen<br />
    8. 8. 8<br />Example of a change in Balance Sheet - Starting Point<br />By Tami Bertelsen<br />
    9. 9. 9<br />Example of a change in Balance Sheet – Ending PointIf I write a check to you for $500,000, and you bank at Macrobank, a deposit of $500,000 comes into the bank. <br />By Tami Bertelsen<br />Note: This does not effect the overall money supply because they are just new reserves written from one bank to another. The Fed’s overall reserves remain the same<br />
    10. 10. Open Market Operations<br />The Fed can make a direct effect on the overall level of reserves. The Fed buys and sells U.S. Government securities in the open market. <br />10<br />By Tami Bertelsen<br />
    11. 11. Open Market Operations example<br />11<br />By Tami Bertelsen<br />
    12. 12. Money Multiplier<br />12<br />Actual change in money supply is equal to the actual money multiplier * change in excess reserves or 10*200,000=2,000,000 in our example.<br />Gives the maximum change in the money supply due to a change in reserves. Mathematically it is equal to 1 / required reserve ratio. So, if the required reserve ratio is 10%, the multiplier would be 1 / 0.1 = 10.<br />By Tami Bertelsen<br />
    13. 13. Discount rateis the interest rate that the Fed changes its Members for certain short-term loans.<br />Lowering the discount rate Counteracts a recessionary trend by making it easier for banks to increase their reserve funds.<br />Raising the discount rate Tends to counteract inflation by making it more difficult for member banks to increase their reserves.<br />13<br />Discount Rate <br />By Tami Bertelsen<br />
    14. 14. The Fed can change the percentage of depositor’s money that commercial banks are required by the Fed to keep on deposit in cash. <br />14<br />Reserve Requirement Changes<br />By Tami Bertelsen<br />
    15. 15. To expand money supply (during deflationary periods)<br />15<br />1. Buy securities in the open market<br />2. Lower the discount rate <br />3. Lower reserve requirements<br />By Tami Bertelsen<br />
    16. 16. To tighten money supply (during inflationary periods)<br />16<br />1. Sell securities in the open market<br />2. Raise the discount rate<br />3. Raise reserve requirements<br />By Tami Bertelsen<br />
    17. 17. Demand for Money<br />17<br />By Tami Bertelsen<br />
    18. 18. Demand for money curveInverse relationship between the Interest rate and the Quantity of Money<br />18<br />By Tami Bertelsen<br />
    19. 19. Money Supply CurveThe quantity of money is fixed at a given time and is vertical. <br />19<br />By Tami Bertelsen<br />
    20. 20. Direct Effect <br />Indirect Effect<br />An increase in money supply leads directly to an increase in aggregate demand.<br />When there is excess money, some people deposit it in banks. These funds are then converted to loans at a lower interest rate. When interest rates fall, planned investment rises. When investment falls, real GDP falls and aggregate demand increases.<br />20<br />Money Supply increase effects on AD<br />By Tami Bertelsen<br />
    21. 21. Aggregate Demand <br />21<br />By Tami Bertelsen<br />
    22. 22. Shift in Aggregate Demand<br />22<br />By Tami Bertelsen<br />
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