1. Money and Banking

2. What is the Fed? Central bank of the United States Established in 1913
Purpose is to ensure a stable economy for the nation
What is the Fed?
The Federal Reserve is the central bank of the United States and its purpose is to help ensure a stable economy for the nation.
Established as a result of the Federal Reserve Act, signed in 1913.
Receives no congressionally appropriated funds. Its operations are financed primarily from the interest earned on the U.S. government securities it acquires in the course of its monetary policy actions.
Another major source of income is derived from the fees received for certain services provided to depository institutions.
After payment of certain expenses, all the net earnings of the Federal Reserve Banks are transferred to the U.S. Treasury. In 2004, for example, the Fed paid approximately $18.1 billion to the U.S. Treasury.

3. Structure of the Fed
Board of Governors – 7 members appointed by the President; Serve 14 year terms
District Banks – 12 banks each responsible for a district – Memphis/ Millington is in district 8 located in St. Louis
Bank for Banks

4. Where is my Fed?
Reserve Banks are the decentralized components that carry out the Fed’s policies and activities at the regional level.
Each bank is identified with a corresponding letter and number to identify Districts.
There are several Divisions within the Fed that carry out its mandated responsibilities: Supervision & Regulation, Financial Services and Research.

5. Structure of the Fed
FOMC – 12 members (7 Board of Governors, New York district bank president, and 4 rotating district bank presidents)
They meet 8 times a year and make decisions about the growth of the money supply and the level of interest rates

6. Fed Functions Providing Financial Services
Bank for banks and bank for federal government
Check Clearing
Issuing Currency - Fed issues and the
Bureau of Engraving and Printing
actually prints

7. Fed Functions Supervising and Regulating Banks
Regulation is the rules that define what is acceptable behavior and bank supervision is enforcement of these rules

8. Fed Functions
Conducting Monetary Policy – actions taken by the Fed to ensure that the economy is working at its best, not having inflation or a recession
(controlling the money supply)

9. Monetary Policy 1. Reserve Requirement 2. Discount Rate
Tools:
1. Reserve Requirement
2. Discount Rate
3. Open market operations

10. Reserve Requirement
Required amount of money that the bank has to leave on hand at the bank and cannot lend out.
Current RR is 10%

11. How do banks create money?
Deposit
10% Reserve Requirement
Loans Made
$1,000
$100
$900

12. How do banks create money?
Deposit
10% Reserve Requirement
Loans Made
$1,000
$100
$900
$90
$810
The recipient of the $900 loan spends it, and the recipient deposits his money in a bank. This bank only holds 10% of the money, $90, and the bank proceeds to loan out the rest of the money, $810. This continues through the rest of the loans and deposits into banks.

13. How do banks create money?
Deposit
10% Reserve Requirement
Loans Made
$1,000
$100
$900
$90
$810
$81
$729
729
$72.90
$656.10
$65.61
$590.49
$59.05
$531.44
$53.14
$478.30
When all the money has been deposited, loaned out, re-deposited, re-loaned out, etc. until there is no more money to loan out, you will arrive at these totals
$10,000
$1000
$9,000

14. Conducting Monetary Policy
Reserve Requirement
Reserve Requirement – Up
Money Supply – Down (contractionary/tight monetary policy)
Reserve Requirement – Down
Money Supply – Up (expansionary/loose monetary policy)

15. Conducting Monetary Policy
Interest Rate is the price you pay to borrow or the price you charge for a loan
Discount Rate
Discount Rate – Up
Money Supply – Down (contractionary/tight monetary policy)
GDP?
Unemployment?
Discount Rate – Down
Money Supply – Up (expansionary/loose monetary policy)
GDP?
Unemployment?

16. Conducting Monetary Policy
Open Market Operations (Most Common Tool Used) – Buying and selling of bonds
Sell Bonds
Money Supply – Down (contractionary/tight monetary policy)
Buy Bonds
Money Supply – Up (expansionary/loose monetary policy)

17. What are three actions the Fed could take to increase the money supply
What are three actions the Fed could take to increase the money supply? When would they want to do this?
What are three actions the Fed could take to decrease the money supply? When would they want to do this?

18. Monetary Policy The Federal Reserve System has three main policy tools at its disposal. It uses these tools to affect the money supply and interest rates.