1. Copyright ©2001, South-Western College Publishing Contemporary Economics: An Applications Approach By Robert J. Carbaugh 1st Edition Chapter 15: The Federal Reserve and Monetary Policy

2. Carbaugh, Chap. 15 2 Structure & organization of the Federal Reserve System The Federal Reserve System

3. Carbaugh, Chap. 15 3 Tools of monetary policy Monetary Policy Federal Reserve Open Market Operations Discount Window Loans Total Reserves in the Banking System Trade Reserves Banks with Banks that Excess Reserves Want Reserves Repayments drain Extensions add Securities sales drain Securities purchases add

4. Carbaugh, Chap. 15 4 Open market operations Monetary Policy Federal Reserve AssetsLiabilities Government securitiesDeposits of Seafirst Bank+ $10 million Seafirst Bank AssetsLiabilities Reserves with Fed+ $10 mill. Gov't securities- $10 mill. Fed open market purchases of securities directly from a commercial bank

5. Carbaugh, Chap. 15 5 Fed's discount window in action Monetary Policy Federal Reserve AssetsLiabilities Loan to Bank of OregonDeposits of Bank of Oregon+ $1 million Bank of Oregon AssetsLiabilities Reserves with Fed+ $1 mill.Due to Fed+ $1 million

6. Carbaugh, Chap. 15 6 Discount rates of the Fed Monetary Policy Date announceddiscount rate 1990Dec. 196.5% 1991Feb. 16.0 Apr. 305.5 Sept. 135.0 Nov. 64.5 Dec. 203.5 1992July 23.0 1994May 173.5 Aug. 164.0 Nov. 154.75 1995Feb. 15.25 1996Jan. 315.0 1998Nov. 174.5 Source: Federal Reserve Bulletin

7. Carbaugh, Chap. 15 7 Required reserve ratios of the Fed Monetary Policy Required reserve Type of depositratio (%) Checking deposit $0 - $47.8 million3 > $47.8 million10 Savings and time depositsnone required Source: Federal Reserve Bulletin, April 1999

8. Carbaugh, Chap. 15 8 Combating inflation: tight money Price level (price index) AD 0 A B AS AD 1 Effects of monetary policy on the economy Monetary Policy Combating recession: easy money Price level (price index) AD 0 A B AS AD 1

9. Carbaugh, Chap. 15 9 Using monetary pollicy Monetary Policy EconomicOpen marketDiscountReserve Problem/policyoperationsraterequirements Recession (easy money)Buy securitiesDecreaseDecrease Inflation (tight money)Sell securitiesIncreaseIncrease Source: Federal Reserve Bulletin, March 1999 Using monetary policy to combat recession or inflation

10. Carbaugh, Chap. 15 10 Japan's liquidity trap Monetary Policy Banks Burdened by bad debts and short of capital, banks weren't lending. Instead, they were placing excess reserves in government securities. Businesses Businesses had little incentive to borrow to finance new investment because Japan had industrial capacity coming out of its ears. Consumers Consumers were so worried about job security and falling incomes that they were saving, not spending, even though bank deposits paid less than 1% interest.