1. Explorations in Economics
Alan B. Krueger & David A. Anderson

2. Chapter 17: The Federal Reserve and Monetary Policy
Module 50: The Federal Reserve System
Module 51: The Federal Reserve and Traditional Monetary Policy
Module 52: Extraordinary Times, Extraordinary Tools

3. Do Now – The Most Powerful Woman in America – Who is She?
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4. MODULE 50: THE FEDERAL RESERVE SYSTEM
KEY IDEA:
As the nation’s central bank, the Federal Reserve acts to maintain the safety of the banking system and the stability of the economy.
OBJECTIVES:
To explain why the Federal Reserve System was created.
To identify the structure of the Federal Reserve System.
To describe the functions of the Federal Reserve System.
To explain the role of the Federal Reserve System in formulating and executing monetary policy.
The Federal Reserve plays a key role in setting the pace of overall economic activity in the country. The FED was created when Woodrow Wilson signed the Federal Reserve Act in to law in 1913.

5. THE CREATION OF THE FEDERAL RESERVE SYSTEM
The Federal Reserve Act of 1913
Panic of 1907 convinced Americans that a central bank could provide stability.
The “Fed” becomes the bankers’ bank.
Owned by the U.S. Government
But run by an independent board of governors.
Discuss the reasons for the central banking system
Debate the idea of privately owned or owned and regulated by the Federal government. You can also explain the banks can borrow from each other at an extremely low rate or borrow from the Fed at a slightly higher rate to encourage private sector banking.

6. Fed’s Role and Structure
Fed In Plain English
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7. THE PURPOSE OF THE FEDERAL RESERVE SYSTEM
Sets monetary policy – full employment and price stability to promote economic growth.
Maintains stable banking system by regulating banks, and by making loans to member banks.
Provide financial services (check clearing house) for the federal government and banking for commercial banks.
Discuss why these four points are important to an economy. The Federal Reserve system turned 100 in 2013.
How are these functions different from commercial banks?

8. The Federal Reserve Bank
Fed Organization
Board of Governors
The Federal Reserve Bank
12 Regional Banks
Open Market Committee
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9. ORGANIZATION OF THE FEDERAL RESERVE SYSTEM
The Board of Governors of the Federal Reserve is made up of seven members appointed by the president. Key idea: Fed is independent of politics.
Manage the operations of the Federal Reserve System
Serve 14-yr terms; appointed by President
Oversees operations of the Federal Reserve Banks
Chair and Vice Chair chosen by members
Set Monetary Policy for the nation
Show the students the Board of Governors and the education of the Governors.

10. ORGANIZATION OF THE FEDERAL RESERVE SYSTEM
The Federal Reserve Banks implement Federal Reserve policies and provide services to member banks and federal government agencies.
12 District and 24 branch banks; each has 9- member board of directors
Hold cash reserves and make loans for depository institutions
Act as agent for federal government
Supervise and act as bank examiner of the Fed
Ask students which district banks serves their area?
Ask students if they could open an account in their district bank?They can buy and redeem government securities and Savings Bonds at FED banks

11. ORGANIZATION OF THE FEDERAL RESERVE SYSTEM
Member banks of the Federal Reserve System include all nationally chartered banks and many state- chartered banks. They are stockholders in their district bank and help elect the district’s board of directors.
Students will usually ask about the varying geography. Remind them that it was 1913 and most people lived east of the Mississippi River.
What services do the 12 District Banks provide? check clearing, electronic funds transfer, and distribution of currency

12. ORGANIZATION OF THE FEDERAL RESERVE SYSTEM
The Federal Open Market Committee is the group within the Federal Reserve that creates monetary policy.
Use the “beige book” online to show the students the metrics the FOMC uses to measure the economy.
Use the graphic to explain the Fed’s oranization.

13. What is Monetary Policy?
Actions to smooth out the ups and downs of the business cycle by controlling the money supply and interest rates.
In the USA, monetary policy is set by the Federal Open Market Committee (FOMC) of the Federal Reserve Bank.
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14. What happens to consumer borrowing when interest rates rise? Fall?
Pair - Share
What happens to business investment when interest rates rise? When they fall?
What happens to consumer borrowing when interest rates rise? Fall?
Based on the above, what happens to the economy when interest rates rise / fall?
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15. Money Supply and Interest Rates
By increasing or decreasing the money supply, we can increase or decrease interest rates.
Challenge the students to graph this money market model for themselves at the board or in notebooks.
Explain how the money supply increases or decreases when the Fed buys and sells securities.
*The price of money is an interest rate and the opportunity cost to hold money
*Money suppy is fixed.
*Changes in price levels or income levels affect the demand for money.

16. Monetary Policy Increase Money Supply (expansionary, easy money)
Decrease Money Supply
(contractionary, tight money)
Decrease interest rates
Increase interest rates
Increase investment and consumer spending (aggregate demand)
Decrease investment and consumer spending (aggregate demand)
Increases GDP
Decrease GDP
Increases prices
Decrease prices
Decrease unemployment
Increase unemployment
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17. Monetary Policy Organizer
With your desk partner, complete the contractionary vs. expansionary chart.
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18. How does the Fed change the money supply?
It uses the money creation ability of the fractional reserve system!
By increasing or decreasing bank reserves, the Fed can increase or decrease the money supply.
Changes in money supply increase or decrease interest rates.
Reserves can be changed through “open market operations”
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19. How the Fed increases the money supply (easy money)
Buys treasury bonds from banks
Banks
Fed
Payment to banks increases bank reserves and the money supply
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20. How the Fed decreases the money supply (tight money)
Sells treasury bonds from banks
Banks
Fed
Banks pay the Fed decreasing bank reserves and the money supply
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21. TRADITIONAL MONETARY POLICY TOOLS
Other tools of monetary policy
The discount rate is the interest rate that the Fed charges financial institutions for short- term loans. Reserve Requirements-the percentage of demand deposits that banks must keep. The Fed does not change this often but it is powerful when they do.
Make sure they know the difference between the discount rate and the Fed funds rate.
Discuss how an increase in the discount rate or a increase in the reserve requirment could raise speculation about the health of the economy.
The use of the discount rate in by the FED was one of the extraordinary tools employed in the Great Recession.

22. JPM lends excess reserves
Fed Funds Rate
Fed funds: bank deposits at the Fed. Fed funds rate: interest rate that banks charge other banks to borrow their deposits at the Fed.
JPM lends excess reserves
Citibank
needs reserves
JP Morgan has excess reserves
Citi pays interest
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23. The Fed is the banker’s bank.
Summary
The Fed is the banker’s bank.
Major jobs – keep banking system stable, inflation low and unemployment low, provide financial services to member banks.
Controls money supply through open market operations.
Tight money leads to higher interest rates, lower spending and slows economy.
Easy money leads to lower interest rates, higher spending and faster growing economy.
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24. Deficit, balance, surplus, national debt Mandatory vs. discretionary
Review – Big Ideas
Federal Budget:
Deficit, balance, surplus, national debt
Mandatory vs. discretionary
Entitlement vs. means tested
Fiscal Policy:
Expansionary – taxes & spending
Contractionary – taxes & spending
Limitations of fiscal policy
Pros & Cons of national debt.
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25. Excess vs. required reserves Fractional reserve system Money creation
Review – Big Ideas
Money & Banking:
3 uses
3 types
Excess vs. required reserves
Fractional reserve system
Money creation
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26. Federal Reserve & Monetary Policy: 3 roles of the Fed
Review – Big Ideas
Federal Reserve & Monetary Policy:
3 roles of the Fed
3 parts of the Fed
Expansionary monetary policy
Contractionary monetary policy
Advantages of monetary policy
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