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

Principles of Principles of MacroeconomicsMacroeconomics

ECON 401ECON 401

Dr. Andrew L. H. ParkesDr. Andrew L. H. Parkes““A Macroeconomic Understanding for use in A Macroeconomic Understanding for use in

Business”Business”

卜安吉卜安吉

Principles of Macroeconomics, Day Principles of Macroeconomics, Day 88

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We have Covered this We have Covered this before!before!

Chapter 29: Money Creation and the FedChapter 29: Money Creation and the Fed– Know the functions: Store of Value, Unit of Know the functions: Store of Value, Unit of

account and medium of exchangeaccount and medium of exchange

Fiat Money versus Commodity Money Fiat Money versus Commodity Money

M1 is made up of what three components?M1 is made up of what three components?


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The FedThe Fed

What are the three components of the Fed What are the three components of the Fed organization?organization?

– The Governors The Governors – The Federal Reserve BanksThe Federal Reserve Banks– The Federal Open Market CommitteeThe Federal Open Market Committee


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Three Tools of the Fed (CB)Three Tools of the Fed (CB)

1.Open Market Operations

2.Discount Rate

3.Reserve Requirement

Bernanke, Chair

Mishkin

Kohn, Vice Chair

WarshKrosnerCurrently there are 5 Federal Reserve Board Governors:


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1. Open Market Operations1. Open Market Operations Federal Open Market Committee Federal Open Market Committee

(FOMC)(FOMC)– The 7 Board of GovernorsThe 7 Board of Governors– New York Fed Bank PresidentNew York Fed Bank President– 4 other Presidents of the 11 other Fed 4 other Presidents of the 11 other Fed

BanksBanks

Buy and Sell U.S. Treasury Bills (Notes Buy and Sell U.S. Treasury Bills (Notes and Bonds too but mostly Bills) which and Bonds too but mostly Bills) which increases/decreases the interest rate increases/decreases the interest rate (respectively).(respectively).


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2. Required Reserve Ratio2. Required Reserve Ratio

Set by the Governors - the Reserve Set by the Governors - the Reserve Ratio is the percentage of Ratio is the percentage of checkable deposits that must be checkable deposits that must be kept at the Federal Reserve kept at the Federal Reserve District Bank in their District as District Bank in their District as cash.cash.

The effect is that the cash is not The effect is that the cash is not available for banks to loan out.available for banks to loan out.


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3. Discount Window3. Discount Window

The Discount Window is not a The Discount Window is not a physical place but means that physical place but means that commercial banks may borrow commercial banks may borrow from the Fed at the Discount from the Fed at the Discount Rate.Rate.


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The Federal Reserve SystemThe Federal Reserve SystemFrom Introduction to Financial Management (FIN 102)From Introduction to Financial Management (FIN 102)

The Board of GovernorsThe Board of Governors The Fed BanksThe Fed Banks The Federal Open The Federal Open

Market Committee Market Committee (FOMC)(FOMC)


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The FedThe Fed: The Board of : The Board of GovernorsGovernors


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The Fed:The Fed: The Fed Banks The Fed BanksThe Twelve Federal Reserve Districts – The Fed Banks


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The Fed:The Fed: The FOMC The FOMC 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?


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The Fed:The Fed: The FOMC The FOMC 2007 Members of the FOMC2007 Members of the FOMC MembersMembers

Ben S. BernankeBen S. Bernanke, Board of Governors, Chairman, Board of Governors, ChairmanTimothy F. GeithnerTimothy F. Geithner, New York, Vice Chairman, New York, Vice ChairmanCharles L. EvansCharles L. Evans, Chicago, ChicagoThomas M. Thomas M. HoenigHoenig, Kansas City, Kansas CityDonald L. KohnDonald L. Kohn, Board of Governors, Board of GovernorsRandall S. Randall S. KrosznerKroszner, Board of Governors, Board of GovernorsFrederic S. Frederic S. MishkinMishkin, Board of Governors, Board of GovernorsWilliam PooleWilliam Poole, St. Louis, St. LouisEric S. Eric S. RosengrenRosengren, Boston, BostonKevin M. Warsh, Board of GovernorsKevin M. Warsh, Board of Governors

Alternate MembersAlternate MembersRichard W. Fisher, DallasRichard W. Fisher, DallasSandra Pianalto, ClevelandSandra Pianalto, ClevelandCharles I. Plosser, PhiladelphiaCharles I. Plosser, PhiladelphiaGary H. Stern, MinneapolisGary H. Stern, MinneapolisChristine M. Cumming, First Vice President, New York Christine M. Cumming, First Vice President, New York

Next Meeting: April 29, 2008

.25% or .5%?


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The Fed:The Fed: The Chairman The Chairman

Ben Bernanke

Where is it today?


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Money CreationMoney Creation

Know how banks create money through Know how banks create money through demand deposits (checking demand deposits (checking accounts) and how the money accounts) and how the money multiplier works.multiplier works.

See Homeworks See Homeworks

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

Documents

fed banks slide

fed funds rate

fed presidents

fed chapter

fed organization

fed cb

federal reserve banks

discount rate