Principles of Macroeconomics ECON 401 Dr Andrew L

Principles of Macroeconomics ECON 401 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” Principles of Macroeconomics, Day 8 卜安吉

We have Covered this before! n Chapter 29: Money Creation and the Fed – Know the functions: Store of Value, Unit of account and medium of exchange n Fiat Money versus Commodity Money n M 1 is made up of what three components? Principles of Macroeconomics, Day 8 2

The Fed n What are three components of the Fed organization? – The Governors – The Federal Reserve Banks – The Federal Open Market Committee Principles of Macroeconomics, Day 8 3

Three Tools of the Fed (CB) Bernanke, Chair Kohn, Vice Chair 1. Open Market Operations 2. Discount Rate 3. Reserve Requirement Mishkin Currently there are 5 Federal Reserve Board Governors: Principles of Macroeconomics, Day 8 Krosner Warsh 4

1. Open Market Operations n Federal Open Market Committee (FOMC) – The 7 Board of Governors – New York Fed Bank President – 4 other Presidents of the 11 other Fed Banks n Buy and Sell U. S. Treasury Bills (Notes and Bonds too but mostly Bills) which increases/decreases the interest rate (respectively). Principles of Macroeconomics, Day 8 5

2. Required Reserve Ratio Set by the Governors - the Reserve Ratio is the percentage of checkable deposits that must be kept at the Federal Reserve District Bank in their District as cash. The effect is that the cash is not available for banks to loan out. Principles of Macroeconomics, Day 8 6

3. Discount Window n The Discount Window is not a physical place but means that commercial banks may borrow from the Fed at the Discount Rate. Principles of Macroeconomics, Day 8 7

The Federal Reserve System From Introduction to Financial Management (FIN 102) n The Board of Governors n The Fed Banks n The Federal Open Market Committee (FOMC) Principles of Macroeconomics, Day 8 8

The Fed: The Board of Governors Principles of Macroeconomics, Day 8 9

The Fed: The Fed Banks The Twelve Federal Reserve Districts – The Fed Banks Principles of Macroeconomics, Day 8 10

The Fed: The FOMC Ø Ø Ø Ø The FOMC: The Seven Governors, New York Fed President and 4 other Fed Presidents – 12 total members Set Monetary Policy for the United States In other words, the FOMC sets the “Federal Funds Rate” – The interest rate that banks borrow funds from each other The “Fed Funds” rate determines the “Prime” rate or the interest rate that banks charge their “best” corporate customers An Increase in the fed funds rate means borrowing is more “expensive. ” A decrease? Principles of Macroeconomics, Day 8 11

The Fed: The FOMC Ø Ø 2007 Members of the FOMC Members Ben S. Bernanke, Board of Governors, Chairman Timothy F. Geithner, New York, Vice Chairman Charles L. Evans, Chicago Thomas M. Hoenig, Kansas City Donald L. Kohn, Board of Governors Randall S. Kroszner, Board of Governors Frederic S. Mishkin, Board of Governors William Poole, St. Louis Eric S. Rosengren, Boston Kevin M. Warsh, Board of Governors Ø Alternate Members Richard W. Fisher, Dallas Sandra Pianalto, Cleveland Charles I. Plosser, Philadelphia Gary H. Stern, Minneapolis Christine M. Cumming, First Vice President, New York Principles of Macroeconomics, Day 8 Next Meeting: April 29, 2008 . 25% or. 5%? 12

The Fed: The Chairman Where is it today? Ben Bernanke Principles of Macroeconomics, Day 8 13

Money Creation Know how banks create money through demand deposits (checking accounts) and how the money multiplier works. See Homeworks Principles of Macroeconomics, Day 8 14