Mon fed monetary policy

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