Mon fed monetary policy


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Mon fed monetary policy

  1. 1. Look carefully at your money
  2. 2. 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
  3. 3. Types of money supply
  4. 4. 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.
  5. 5. 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
  6. 6. What if the bank goes out of business? • $250,000 per US account
  7. 7. How does the US banking system work?
  8. 8. Does the bank have to keep all the money you deposit on hand? NO, fractional reserve system
  9. 9. What is a Credit Union then? • Smaller, regional, non-profit, theme based, lower rates
  10. 10. Who regulates the banks? • “The Fed” • 1913
  11. 11. How does “the Fed” work?
  12. 12. 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:
  13. 13. 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
  14. 14. 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.
  15. 15. The Fed’s Organization • 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.
  16. 16. Who controls “the Fed”?
  17. 17. The Fed’s Organization • 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).
  18. 18. 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.
  19. 19. The Federal Reserve System The Federal Reserve Banks The New York Fed implements some of the Fed’s most important policy decisions.
  20. 20. The Fed’s Organization • 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.
  21. 21. What does “the Fed” do? Controls Money supply Supplies Money Clears Checks THE FED Sets Reserve Requirements Gov’t Accounting Supervise Banks
  22. 22. The Fed’s Organization Monetary policy is conducted by the Federal Open Market Committee.
  23. 23. 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
  24. 24. Fed’s Tools • Open market operations • Reserve Rate • Discount Rate • Lender of last resort
  25. 25. 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.
  26. 26. 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.