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The Federal Reserve and Monetary Policy

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Presentation on theme: "The Federal Reserve and Monetary Policy"— Presentation transcript:

1 The Federal Reserve and Monetary Policy
The Federal Reserve Bank serves as the CENTRAL bank for the United States. The Federal Reserve Bank is commonly called “the Fed.”

2 The Fed 1. SUPERVISES member banks 2. HOLDS cash reserves 3. MOVES money into or out of CIRCULATION.

3 Each region has it’s own Fed
This is so the national Fed doesn’t have too much power There are 12 Feds (dollar bills have the number of the Fed they came from on it)

4 Fed Services Check Clearing (40 Billion Checks are cleared each year)

5 How it works: 1. I write a check for $100 to Mega Sports Supply in Austin, TX.

6 2. Mega Sports deposits the check into their bank account at the Texas National Bank.

7 3. Texas National adds $100 to Mega Sports’ account and sends my check to the Fed district bank in DALLAS.

8 4. The Dallas district bank transfers $100 to THE TEXAS NATIONAL BANK reserve account, and sends the check to the Atlanta Fed. Reserve Bank.

9 5. The ATL Fed. Reserve Bank receives the check and transfers $100 to the DALLAS Federal Reserve Bank, and then sends the CHECK to my bank, First Union.

10 6. My bank receives the check and transfers $100 from my account back to the Federal Reserve Bank in ATLANTA.

11 Services to the Gov’t: 1. Serves as the Government’s BANK
2. Supervises the Fed’s MEMBER banks 3. Regulates the MONEY SUPPLY

12 The Fed regulates the money supply so that it can replace worn currency, but also to control the supply of money in our nation for economic reasons.

13 Types of Money: M1=CURRENCY, TRAVELER’S CHECKS, and DEMAND deposits

14 Which person has more influence over the U.S. economy?
George Bush Ben Bernanke Dick Cheney Your economic teacher All of Congress

15 Ben Bernanke

16 Bernanke is the leader of the United States economy.
He supervises the Fed and tells them what to do.

17 Monetary Policy The plan to EXPAND or CONTRACT the money supply in order to INFLUENCE the cost and availability of CREDIT.

18 After the Fed measures the money supply in the U. S
After the Fed measures the money supply in the U.S., it decides to use either EASY-MONEY POLICY or TIGHT-MONEY POLICY to correct certain areas in our economy.

19 Easy-Money Policy Lower interest rates
INCREASES the money supply and creates jobs lowers UNEMPLOYMENT and promotes economic growth.

20 Tight-Money Policy Raises interest rates (makes money TIGHT)
DECREASES the money supply and slows business activity to help stabilize PRICES

21 3 Ways the Fed can control the money supply:
1. DISCOUNT RATE 2. OPEN MARKET OPERATIONS 3. RESERVE REQUIREMENT

22 Discount Rate The INTEREST rate the Fed charges its MEMBER banks for the use of its RESERVES.

23 The “prime rate”(minimum interest rate that banks charge on LOANS to customers) usually rises and falls as the discount rate rises and falls.

24 Lowering the discount rate encourages BORROWING.
Borrowing encourages SPENDING. Encourages economic GROWTH.

25 Open Market Operations
Open Market Operations (the MAIN tool of the Fed) is the buying and selling of government SECURITIES.

26 What it does To contract the money supply, the Fed will SELL securities to people. Because people are “getting rid” of their money at that time, the money supply will SHRINK.

27 To expand the money supply, the Fed will BUY securities back from people and businesses. That puts more money back into the HANDS of consumers and expands the money supply.

28 Reserve Requirement The money that MUST BE HELD by banks (either in their own vaults or in their ACCOUNTS at the district Federal Bank).

29 A HIGH reserve requirement (like 15%) requires that banks must keep that money and NOT loan it out.

30 A LOW reserve requirement (2.5%) allows banks to loan out MORE money.

31 Lowering the reserve requirement encourages BORROWING.
Borrowing encourages SPENDING. Encourages economic GROWTH.

32 While the Fed does use the reserve requirement tool to influence the economy, the Fed does not make frequent or dramatic changes in the reserve requirement.

33 That would cause INSTABILITY in the banking system
That would cause INSTABILITY in the banking system. The percentage does change annually according to a FORMULA specified in the Monetary Control Act of 1980.


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