Exploration 20

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Exploration 20

• The Federal Reserve Bank FED

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Thread

• In the United States the Federal Reserve Bank
  (FED or central bank) is charged by law with
  managing the nations money supply.
• How does it do that?
• What are its goals?

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You should be able to

• Summarize the structure and duties of the FED,
  including the FOMC
• Explain how the three tools of monetary policy
  operate to change the money supply

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Federal Reserve System The FED
Created by Congress in 1913
To control the nations money supply
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Figure 12-2
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(No Transcript)
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http//www.stlouisfed.org/publications/pleng/fomc_
pic.html
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How does the FED control the money supply?

• Monetary base is made up of
• Total reserves in the banking system
• Currency in circulation
• By controlling the monetary base, the FED can
  influence the money supply
• It does this through affecting banks behavior
• Three tools are available to do this . . .

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Tools of Monetary Policy

• Policy Tool
• Reserve Requirement
• Discount rate
• Open Market Operations
• Federal Funds Rate an operating target

• M1 Up
• Lowered
• Lowered
• Buy

M1 Down
Raised
Raised
Sell
http//www.bloomberg.com/markets/rates/
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The Fed Funds Rate and the Discount Rate since
1990
Figure 12-4
Back
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Use when in a recessionary gap (or one is
threatened)
Back
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Use when in an inflationary gap (or one is
threatened
Down
Back
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Monetary policy step-by-step

• Team Exercise

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Wrap up What did you learn?

• What is the FED? What is the FOMC? What are
  their roles? What groups have disproportional
  power in the FED?
• What are the three tools of monetary policy? How
  does each function to change the money supply?
• How do changes in the money supply affect AD?