2Open Market Operations The Fed buys and sells securities, usually government securitiesWhen the Fed buys securities the money supply expands, and i fall, assuming money demand remains constant. That would be from 5% to 4% i below.
3Open Market Operations When the Fed sells securities the money supply contracts, and i rises, assuming money demand remains constant. That would be from 4% to 5% i below.
4The Discount RateThis is the rate the Fed charges banks who borrow from the Fed itself.The Fed lends money from what is called the discount window, which is the lending facility at the Fed.The Fed charges what is called the Discount Rate for the loan.
5Monetary Policy The Fed is in charge of Monetary Policy. Monetary Policy is the Fed manipulation of the money supply to influence short-term i rates and the available amount of credit.
6Tools of Monetary Policy Sets the reserve ratio (r)Legal reserves = require reserves (r) + excess reservesr = the ratio of reserves to depositsSets the discount rateOpen market operation (the most popular)
7Functions of the Fed 1. Monetary Policy(expansionary/contractionary) 2. Supervision & Regulation of Financial Institutions3. Lender of Last Resort4. Provides Banking Services to the Government5. Issues Coin & Currency6. Financial Services to Commercial Banks
8Board of Governors 7 members Appointed by the President Approved by the Senate Headed by the Chairman (Alan Greenspan)*all governors have 14 year terms, except for the chairman who has a 4 year term
9Policy Making Body of the Fed Federal Open Market Committee (FOMC)Members of the FOMC: Board of Governors (including the chair) The President of the NY Fed Four other Regional Bank Presidents (on arotating basis)