Pyramid You gonna make a pyramid Build a

Pyramid!!!! You gonna make a pyramid!!!!

Build a pyramid n You need to draw a pyramid with 3 levels n n n The bottom level must have more than 12 small sections. The second level must have 12 sections, each must be bigger than all of the sections on the bottom level. The top level must have two overlapping sections,

Activator What do you notice about the pyramid at the front of the room? n How could this possibly relate to macroeconomics? n Do you participate in this pyramid in any way? n

The pyramid represents the Federal Reserve System The Federal Reserve System is more commonly known as “The Fed. ” n The purpose of the FED is “To Furnish am elastic currency and a more effective supervision of banking in the United states n Note the difference, not “the Feds”

How Does it achieve this purpose? n n Supervise member banks, holds cash reserves for banks or the government, moves money into and out of circulation. It does this in order to try and stabilize the money supply and banking system

What are the characteristics of the FED? Lack of a single central bank n Ownership and control by member banks n Optional Membership in the FED for some banks n

So why were there rules to the levels of the pyramid? n There are 3 levels of the Federal reserve. The top level is know as “The National Level” n n It has the Board of governors which is 7 people appointed by the president Also has the Federal Open Market Committee which contains the 7 members of the board plus the president of the federal reserve bank of New York and presidents 4 other district banks

The District Level Consists of 12 Federal reserve district banks n They represent the 12 geographical districts n What district are we? Where is the bank located? n

Local level These are the member banks n You and I bank with these banks, have checking accounts and Savings accounts n

What does the Fed do? Provides SERVICES TO BANKS n Clears checks n Provides loans to banks n n Seasonal disasters, financial emergency

What does the FED do? n PROVIDES SERVICES TO THE GOVERNMENT n n n Serves as the governments bank Supervises the FEDS member banks Regulates the money supply n n Money supply-amount of money circulating in the economy The fed enters money into the economy for two reasons, to replace old notes and to increase amount of money in the money supply

MONETARY POLICY n The plan to expand or contract the money supply to influence the cost and availability of credit n n Basically, to increase or decrease aggregate demand Increasing money supply increases aggregate demand decreasing money supply decreases aggregate demand

HOW DOES THIS INFLUENCE THE BUSINESS CYCLE? n How can increasing and decreasing the money supply influence the business cycle? When would the FED increase the money supply and when would they decrease it?

POP QUIZ ON VALENTINES!! n n WHAT HAS HAPPENED TO GDP OVER THE LAST WEEK? WHAT CATEGORY OF THE OUTPUT EXPENDITURE MODEL CHANGED? WAS THERE A CHANGE IN AGGREGATE DEMAND OR AGGREGATE SUPPLY? WHAT TYPE OF INFLATION COULD THIS CAUSE? DRAW IT

HOW CAN THE FED EFFECT THE ECONOMY The FED uses Monetary policy- increasing and decreasing the money supply to regulate spending n The Fed has four “tools” they use in doing this. n

THE FOUR TOOLS OF MONETARY POLICY n FOMC- SELLING AND BUYING BONDS AND SECURITIES n n n SELLING BONDS DECREASES THE MONEY SUPPLY BUYING BONDS INCREASES THE MONEY SUPPLY WHAT EFFECT DOES THE MONEY SUPPLY HAVE ON AGGREGATE DEMAND GDP? § Sell in expansion, buy in recession

The four tools n n The reserve requirement- The total percentage of deposits a bank must keep inside it’s walls High reserve requirements lower the money supply’ Low reserve requirements increase the money supply How does this effect Aggregate demand GDP? n High in expansion, low in recession

FOUR TOOLS n n n DISCOUNT RATE- THE INTEREST RATE (FEE) A MEMBER(LOCAL) BANK MUST PAY TO A DISTRICT BANK FOR A LOAN HIGH DISCOUNT RATES ENCOURAGE BANKS TO HOLD MORE MONEY IN RESERVES LOW DISCOUNT RATES ENCOURAGE BANKS TO LOAN OUT MORE MONEY n Low discount rate in recession, high in expansion

FOUR TOOLS OF MONETARY POLICY n INTEREST RATE OR PRIME RATE- The interest rate or fee that a member (local) bank customer must pay to receive a loan n n High interest rates discourage customers from applying for loans Low interest rates encourage customers to apply for loans n Low in recession, high in expansion

Activator n See how many numbers on the back of your pyramid organizer you can match to the front. Basically, put the correct numbers into the correct level, or list the correct level next to the correct number.

Types of Monetary Policy n Easy Monetary Policy- Increasing the money supply to increase aggregate demand GDP. This is used to help fight unemployment.

Types of Monetary Policy n Tight Monetary policy- Decreasing the money supply to slow GDP growth and Fight Inflation.

Pop quiz 2!!! Name the four tools of monetary policy n Name one way the FED could expand the money supply n Name one way the FED could contract the money supply n Name the 3 levels of the FED n