1. The Fed and Money Supply
Chapter 15 Sections 1 and 2
The Fed and Money Supply

2. Clip of the Day

3. The Federal Reserve (AKA – The Fed)
The central bank of the United States of America.

4. The Fed The “Fed” is a system/network of banks.
Responsible for Monetary Policy.

5. Cont.
Monetary Policy – Changing the growth of money supply in circulation.

6. Federal Open Market Committee
Board of Governors, head of NY Fed Bank, and 4 rotating heads of the other 11 district banks.
Meet 8 times a year to set MONETARY POLICY
Extremely important decision making body.

7. Banking System 12 District Banks – 25 branch banks underneath it.
All national banks must become members of the Federal Reserve System.

9. Monetary Policy
Changing the growth of money supply

10. Loose Money Policy “Expansionary”
Credit is abundant and inexpensive to obtain.
Encourages economic growth

11. Tight Money Policy “Contractionary”
Credit is in short supply and expensive to obtain.
Used to control inflation
Think money when money is “tight” it is harder to get, not as much available.

13. Fractional Reserve Banking
Only a fraction of bank deposits must be kept on hand or in reserves the rest can be lent out.

14. Reserve Requirements
A requirement by the Fed – % of Money that banks must keep on reserve from deposits.
Example – Sam deposits $1000 into a checking account. The reserve requirement is 10%. The bank must therefore hold $100 and may loan out the remaining $900.

15. Multiple Expansion of the Money Supply

16. Regulating the Money Supply
Chapter 15 Section 3
Regulating the Money Supply

17. The Federal Reserve
The main goal of the Federal Reserve is to keep the money supply growing steadily and the economy running smoothly

18. Tool #1 – Changing Reserve Requirements
Reserve Requirements – The % of money that banks must hold from a deposit.
Increase Requirements – Less money available to lend out
Decrease Requirements – More money available to lend out

20. #2 – Discount Rate
Banks can borrow money from the Fed (to meet reserve requirements).
The interest charged by The Fed on these loans is the Discount Rate

21. Cont.
Prime Rate – Interest rate banks charge its best business customers. Banks pass on discount rate changes to customers.

22. Cont.
Decrease Interest Rate = Loans become cheaper to obtain = Loans INCREASE in Quantity Demanded
Increase interest rates – Loans become more expensive – discourages borrowing

23. #3 – Open Market Operations
Buying and selling government securities (Most common tool Fed uses to control money supply
Fed buys securities it is increasing money supply
Fed sells securities it is decreasing money supply

24. Federal Funds Rate
Interest rate that banks charge each other for short-term loans.
Banks that cannot meet reserve requirements must borrow or pay a penalty.

25. Cont.
Fed tries to indirectly change this rate through open market operations.

26. Delays in Effects of Monetary Supply
Full effects can take months, sometimes up to a year

27. Criticisms of Fed Policies
Fed has increased money supply during times of inflation (creating worse inflation)
Fed has decreased money supply during recessions (thereby making the recession worse)

28. Cont.
Some Recommend – Money supply increased at same rate each year (no monetary policy)
Gov’t (spending and taxation) also has a dramatic affect on the economy.