The Federal Reserve

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The Federal Reserve

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The Federal Reserve Chevalier Spring 2015 Janet Yellen Yellen s Critics Economic Philosophy: Keynesian Phillips Curve Inverse relationship between unemployment and ... – PowerPoint PPT presentation

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Title: The Federal Reserve


1
The Federal Reserve
  • Chevalier
  • Spring 2015

2
Warm-Up Review Notes
  • To pursue an expansionary monetary policy, what
    would the Fed do to the three tools of monetary
    policy?
  • What is the Feds most important job?
  • What type of monetary policy would the Fed pursue
    during a recession? Contractionary or
    expansionary?
  • Which group of the Federal Reserves policy
    making body controls the money supply?

3
  • The ease with which an asset can be converted
    into cash is called _________?
  • The money that banks must hold to secure deposits
    is known as ____________?
  • The Federal Reserve Act was sign in what year and
    by what president?

4
Janet Yellen
5
Yellens Critics
  • Economic Philosophy
  • Keynesian
  • Phillips Curve
  • Inverse relationship between unemployment and
    inflation
  • Allowing inflation to rise could be a wise and
    humane policy if it increases output
  • Each percentage point reduction in inflation
    results in 4.4 loss in GDP

6
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7
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8
Structure of the FED
  • Board of Governors- 7 members appointed by the
    President and confirmed in the Senate with a SM
    vote
  • They serve 14 year terms
  • one appointment becomes vacant every two years
    for reasons of experience
  • job is to supervise and regulate the FED

9
Structure of the FED
  • FOMC- 7 members of the Board of governors and 5
    presidents of member banks
  • they decide monetary policy

10
12 FED Banks
11
Check-Clearing
12
Monetary Policy
  • The expansion or contraction of the money supply
    to influence the cost and availability of credit
  • In other words, how easy will money be available?
  • will fluctuate the availability of money based on
    economic factors (inflation, unemployment, GDP)

13
3 tools of monetary policy
  • Changing the discount rate- the rate at which the
    FED lends money to members banks
  • to raise it makes borrowing more expensive for
    banks and less likely for them to extend credit
    (money supply contracts)
  • to lower it makes borrowing less expensive for
    banks and more likely for them to extend credit
    (money supply expands)

14
3 tools of Monetary Policy
  • Open Market Operations- the buying and selling of
    US Treasury bonds
  • when bonds are bought by the FED, checks written
    by the FED add to reserves, expanding the money
    supply
  • when bonds are sold by the FED, checks written by
    buyers subtract from reserves, contracting the
    money supply

15
3 Tools of Monetary Supply
  • Reserve Requirement- The percentage of customer
    deposits a bank must hold as cash in reserve (in
    their vaults)
  • The FED can raise the R.R. (banks must hold a
    larger percentage of deposits as cash, reducing
    available funds to lend out this contracts the
    money supply)

16
3 Tools of Monetary Policy
  • The Fed can lower the R.R. (banks can hold a
    smaller percentage of customer deposits
  • to find out total amount of money created with a
    single deposit, the equation is
  • deposit amount/R.R.

17
Easy Money vs. Tight Money Policy
  • Easy money policy is the expansion of the money
    supply by making credit less expensive to obtain
  • Tight money policy is the contraction of the
    money supply by making credit more expensive to
    obtain

18
Other Monetary Policy Tools
  • Moral suasion- communication between banks, the
    government, and citizens
  • Selective Credit controls- rules on who can
    borrow money