The Federal Reserve System and the Money Supply Process

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The Federal Reserve System and the Money Supply
Process

• Chap 12 (8th edition), Mishkin

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• Goals of monetary policy (in order of priority)
• 1.
• 2.
• 3.
• 4.
• 5.
• 6.

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• II.Brief structure of the FED
• The FEDERAL RESERVE SYSTEM consists of
• 12 regional Federal Reserve Banks (FRBs) which
  have jurisdiction over the 12 Federal Reserve
  districts into which the country is divided.
• Main functions are,
• (i) ____________
• (ii) ____________
• (iii) ____________
• (iv) ____________
• The Board of Governors (BOG)
• 7 members appointed by the President, each
  serving one full nonrenewable 14-year plus part
  of another term (if coming in place of someone
  else)
• chairman serves 4-year renewable terms

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• The Federal Open Market Committee (FOMC)
• meets about every 6 weeks, determines and
  conducts monetary policy
• consists of 7 BOG members president of the New
  York FRB 4 presidents chosen from the other
  FRBs (the other 7 presidents participate but do
  not vote)
• Three tools of monetary policy are
• (i) ___________
• (ii) ___________
• (iii) ___________

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Assets Reserves 10m Liabilities Deposits 100 m
Loans 90 m Securities 10 m Bank capital 10 m
Q1. Suppose the FED purchases 5m worth of T-bonds
from banks (Open market purchase). How does this
affect the balance sheet of the bank? Q2.
Suppose the FED sells off 5m worth of T-bonds to
banks (Open market sale). How does this affect
the balance sheet of the bank? Conclusion Open
market purchase ________ cash reserves of banks.
Open market sale _______ cash reserves of banks.