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PowerPoint # 8: The Federal Reserve
Economics
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The Federal Reserve System is the National Banking Network
4 major parts of the Federal Reserve System (the Fed) Board of Governors—directs/makes policy Appointed by the President, approved by the Senate 14 year term Only one term allowed Keep independent of politics Set Reserve Requirements Review Discount Rate
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4 Major Parts of the Fed Federal Open Market Committee (FOMC):
Sets Fed policy on purchase and sale of government securities (bonds) Consists of the 7 members of the Board of Governors Plus the presidents of 5 of the Federal Reserve Banks
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4 Major Parts of the Fed Federal Reserve Banks
12 National Banks that carry out the Fed’s policy Sets the Discount Rate
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4 Major Parts of the Fed Member Banks
All national banks that carry out the Fed’s policy Have the word “National” in their title The Fed Diagram
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6 Functions of the Fed Holding reserve requirements
Regulating supply of Money Clearing checks—transfers money from your account to another when you write a check
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6 Functions of the Fed Supplying economy with paper currency to:
Replace old worn out bills Supply seasonal demand for cash Not used as a tool to control the money supply
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6 Functions of the Fed Acting as the fiscal agent for the federal government—holds the “checking account” for the Treasury Supervising member banks
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Reserve requirement is one tool used by the Fed to manipulate the $ supply
Reserve requirement: the % of deposits that a bank must keep in its vaults or on reserve with the Fed The Fed regulates (determines the %) of the reserve requirement To keep control over the nation’s money supply %
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Reserve requirement is one tool used by the Fed to manipulate the $ supply
Changing the reserve ratio is the least often tool used by the Fed It is the tool of last resort as a part of the Fed’s monetary policy Monetary policy: the Federal Reserve’s decisions that affect the availability and cost of bank reserves, bank credit, and ultimately, money
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Open Market Operations (OMO) is another tool used by the Fed to control $
OMO—the buying and selling of government securities (Treasury Bill, Treasury Notes, and Bonds) When the Fed buys bonds from individuals it put $ into circulation This increases, loosens, expands the money supply
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Open Market Operations (OMO) is another tool used by the Fed to control $
When the Fed sells bonds, it takes $ out of circulation This decreases, tightens, contracts the money supply OMO is the most flexible and most often used tool of the Fed to manipulate the money supply
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The Discount Rate is another tool used by the Fed to control $
The discount rate is the interest rate the Fed charges depository institutions (banks, savings and loans…) for loans If the Fed raises the discount rate, it is increasing the cost of borrowing Banks will be less likely to borrow Their reserves will not increase They’ll have less $ available for loans This decreases the money supply
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The Discount Rate is another tool used by the Fed to control $
If the Fed decreases the discount rate, then it is decreasing the cost of borrowing $ Banks will be more likely to borrow This will raise bank reserves Banks will have more money available to loan out This increases the money supply This is usually the first tool used by the Fed
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