Chapter 15 Notes

The Federal Reserve System

& Monetary Policy
http://www.federalreserve.gov/aboutthefed/default.htm

Chapter 15 Cornell Notes (Basic Outline)

What is money? Federal Reserve Act (1913)
Mission Statement of the FED Structure of the FED Functions of the FED
Monetary Policy
Tools of Monetary Policy Expansionary Monetary Policy Easy
Contractionary Monetary Policy Tight
Monetary Equation of Exchange
MV = PQ

Chapter 15 Quiz Vocabulary

M2

M1

assets

Liquidity

time deposit
tight money policy
monetary policy
savings account
reserve requirement
prime rate

easy money policy

Member bank reserve
Liabilities
Discount rate
Balance sheet

net worth

M3

Federal funds rate

What is Money?

Characteristics of Money
Portability
Divisibility
Durability
Availability (limited)
* Fiat Money: Money backed by
government decree

Money Defined:
The Function of Money

Medium of Exchange
2. Measure of Value
3. Store of Value
1.

Money Grouped
M1
Currency
Travelers Checks
Demand Deposits (checking accounts)

M2 (everything in M1) +
Savings Accounts
Small Time Deposits (under 100,000)

M3 (everything in M2) +
Large Time Deposits (over 100,000)

Activity 35: All about the Ms

Panic of 1893 & 1907

Who
is
this
dude
?

Federal Reserve Act

On December 23, 1913, the Federal

Reserve System, which serves as the

nation's central bank, was created by an
act of Congress. The System consists of a
seven member Board of Governors with
headquarters in Washington, D.C., and
twelve Reserve Banks located in major
cities throughout the United States.

Mission Statement & The Dual

Mandate
The Federal Reserve System is the central
bank of the United States. It was founded
by Congress in 1913 to provide the nation
with a safer, more flexible, and more
stable monetary and financial system.
Written into the Federal Reserve Act, is
the mission To create a healthy growing
economy with high employment and price
stability.

Functions of the FED

(1)

Financial Services: Bank 4 Banks

(1)
(2)
(3)

US Fiscal Agent
Wholesale banking services
Check clearing

(2) Supervise & Regulation:

Bank Doctor truth in lending act

(3) Monetary Policy:

Deliberate actions of the FED to increase or
decrease the growth rate of the money supply.

Structure of the FED

(1)Board of Governors
(BOG)
(2)FOMC
(3)District & Regional

Banks(4)Commercial & Local

Banks-

Structure of The FED

Current Chairman of the Board of

Governors: Ben S. Bernanke

Yoda?

District Banks
Cincinnati,
Baltimore,
Detroit
Little
Rock,Charlotte
Louville, Memphis
Pittsburgh
(4)
(5)
(7)
((6)

2013 Members of the FOMC

Members
Ben S. Bernanke, Board of Governors, Chairman
William C. Dudley, New York, Vice Chairman
James Bullard, St. Louis
Elizabeth A. Duke, Board of Governors
Charles L. Evans, Chicago
Esther L. George, Kansas City
Jerome H. Powell, Board of Governors
Sarah Bloom Raskin, Board of Governors
Eric S. Rosengren, Boston
Jeremy C. Stein, Board of Governors
Daniel K. Tarullo, Board of Governors
Janet L. Yellen, Board of Governors

San Francisco Reserve Bank

http://www.frbsf.org/federalreserve/people/officers/direct
ors.html

The Money Supply: Oh How it Grows!

Activity 38

Activity 38

Required Reserves & Excess Reserves

Required Reserves the amount banks

most hold in reserves (as determined by

the FED.)
Excess Reserves the amount banks can
load out after they have met their
required reserve.
* Banks are in the buiness to loan out
money, it is how they make money

Money Multiplier
Money Multiplier:

1
mm = ----------RR
* Deposit Amount X mm = Total Money Created

Activity 38 Answers

Activity 38 Answers

Monetary Policy & the FOMC

Tools of Monetary Policy

(1) Discount Rate

The rate of interest that the FED charges

members banks to borrow money from it.

(2) Reserve Requirement
The amount the FED mandates banks hold in

reserve and cant loan out

(3) Open Market Operations
The buying and selling of government bonds.

The FED holds auctions every Monday

http://video.cnbc.com/gallery/?video=3000026496&play=
1

Summary of Monetary Policy Tools

Types of Monetary Policy

Expansionary Easy
Used when the economy is in a recession with high

unemployment.
Reserve Requirement (lower)
Discount Rate (lower)
Open Market Operation (buy)

MS (increase)= interest rates (decrease)

>Investment (increase) > GDP (increase)

>Unemployment (decrease) = Economic
Expansion!
Bad = Inflation

Easy Monetary Policy

Types of Monetary Policy

Contractionary Tight
Used when the economy has inflationary pressure.
Reserve Requirement (up)
Discount Rate (up)
Open Market Operation (sell)

MS (decrease) = interest rates (increase) >

Investment (decrease) > GDP/Output

(decrease) = Price Level (decrease/at least
stabilize)
Bad = Economic Contraction, higher
unemployment, possible recession.

Contractionary Monetary Policy

Activity 39 Answers

Activity 38

Activity 39 Answers

Irving Fisher

The Nature of Capital & Income (1906)

The Rate of Interest (1907)
The Theory of Interest (1930)

Monetary Equation of Exchange

(aka. The Quantity Theory of Money)

MV = PT

M = Money Supply
V = Velocity
P = Aggregate level of prices
T = Transactions (The aggregate level of goods
n services in our economy)

P X T = equals Gross Domestic Product

So, changes in the money supply

directly lead to changes in the GDP.

Monetarism

Milton (uncle milty) Friedman

Chicago School