The Fed and Monetary Policy

The Federal Reserve System The Federal Reserve System is more commonly known as “The Fed.” Note the difference, not “the Feds” The purpose of the FED is “To Furnish a elastic currency and a more effective supervision of banking in the United states

How Does it achieve this purpose? Supervise member banks, holds cash reserves for banks or the government, moves money into and out of circulation. It does this in order to try and stabilize the money supply and banking system

What are the characteristics of the FED? Lack of a single central bank Ownership and control by member banks Optional Membership in the FED for some banks

So why were there rules to the levels of the pyramid? There are 3 levels of the Federal reserve. The top level is known as “The National Level” It has the Board of governors which is 7 people appointed by the president Also has the Federal Open Market Committee which contains the 7 members of the board plus the president of the federal reserve bank of New York and presidents 4 other district banks

The District Level Consists of 12 Federal reserve district banks They represent the 12 geographical districts What district are we? Where is the bank located?

Local level These are the member banks You and I bank with these banks, have checking accounts and Savings accounts

What does the Fed do? Provides SERVICES TO BANKS Clears checks Provides loans to banks Seasonal disasters, financial emergency Guard the reserve $

How it works…. You write a check to pay for your purchase at Publix Publix send the check to their bank (Suntrust) Suntrust send the information from your check to the Fed to make sure it isn’t fake Then the Federal Reserve sends the check to your bank and your bank takes the money out of your account

What else does the FED do? PROVIDES SERVICES TO THE GOVERNMENT Serves as the government's bank Supervises the FEDS member banks Regulates the money supply Money supply-amount of money circulating in the economy The fed enters money into the economy for two reasons, to replace old notes and to increase amount of money in the money supply

MONETARY POLICY The plan to expand or contract the money supply to influence the cost and availability of credit Basically, to increase or decrease aggregate demand Increasing money supply increases aggregate demand and decreasing money supply decreases aggregate demand

HOW CAN THE FED AFFECT THE ECONOMY The FED uses Monetary policy- increasing and decreasing the money supply to regulate spending The Fed has four “tools” they use in doing this.

THE FOUR TOOLS OF MONETARY POLICY FOMC- SELLING AND BUYING BONDS AND SECURITIES SELLING BONDS DECREASES THE MONEY SUPPLY BUYING BONDS INCREASES THE MONEY SUPPLY WHAT EFFECT DOES THE MONEY SUPPLY HAVE ON AGGREGATE DEMAND AND GDP? Sell in expansion, buy in recession

The four tools The reserve requirement- The total percentage of deposits a bank must keep inside it’s walls High reserve requirements lower the money supply’ Low reserve requirements increase the money supply How does this affect Aggregate demand and GDP? High in expansion, low in recession

FOUR TOOLS DISCOUNT RATE- THE INTEREST RATE (FEE) A MEMBER(LOCAL) BANK MUST PAY TO A DISTRICT BANK FOR A LOAN HIGH DISCOUNT RATES ENCOURAGE BANKS TO HOLD MORE MONEY IN RESERVES LOW DISCOUNT RATES ENCOURAGE BANKS TO LOAN OUT MORE MONEY Low discount rate in recession, high in expansion

FOUR TOOLS OF MONETARY POLICY INTEREST RATE OR PRIME RATE- The interest rate or fee that a member (local) bank customer must pay to receive a loan High interest rates discourage customers from applying for loans Low interest rates encourage customers to apply for loans Low in recession, high in expansion

Types of Monetary Policy Easy Monetary Policy- Increasing the money supply to increase aggregate demand and GDP. This is used to help fight unemployment.

Types of Monetary Policy Tight Monetary policy- Decreasing the money supply to slow GDP growth and Fight Inflation.