Principles of Macroeconomics Spring 2010 Day 8 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” 卜安吉.

Principles of Principles of MacroeconomicsMacroeconomics

Spring 2010Spring 2010Day 8Day 8

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

April 27, 2009April 27, 2009 Principles of Macroeconomics, Day Principles of Macroeconomics, Day 88

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Chapter 30: Money, Banking, Chapter 30: Money, Banking, and the Fedand the Fed

Know the functions: Know the functions: – Store of Value, Unit of account and Store of Value, Unit of account and

medium of exchangemedium of exchange

Fiat Money versus Commodity Money Fiat Money versus Commodity Money

M1 is made up of what three M1 is made up of what three components?components?– Currency in Circulation, Demand Deposits Currency in Circulation, Demand Deposits

and travelers checksand travelers checks


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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

“The Fed” is the Central Bank (CB) of the U.S.A.


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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 Kohn, Vice

Chair

WarshDuke

Currently there are 5 Federal Reserve Board Governors:

Tarullohttp://www.federalreserve.gov/aboutthefed/default.htm


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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 BillsBuy and Sell U.S. Treasury Bills (Notes (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). – called open market called open market operationsoperations


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2. Required Reserve Ratio2. Required Reserve Ratio

Set by the GovernorsSet by the Governors - the Reserve - 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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3. Discount Window3. Discount Window

The “lender of last resort” function. The “lender of last resort” function. The original legislation in 1913 The original legislation in 1913

created the Fed in 1914 with only created the Fed in 1914 with only lending to banks as the bank’s role.lending to banks as the bank’s role.


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The Federal Reserve The Federal Reserve SystemSystem 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 2009 Committee Members2009 Committee Members

– Ben S. BernankeBen S. Bernanke, Board of Governors, Chairman , Board of Governors, Chairman – William C. DudleyWilliam C. Dudley, New York, Vice Chairman , New York, Vice Chairman – Elizabeth A. DukeElizabeth A. Duke, Board of Governors , Board of Governors – Charles L. EvansCharles L. Evans, Chicago , Chicago – Donald L. KohnDonald L. Kohn, Board of Governors , Board of Governors – Jeffrey M. Jeffrey M. LackerLacker, Richmond , Richmond – Dennis P. LockhartDennis P. Lockhart, Atlanta , Atlanta – Daniel K. Daniel K. TarulloTarullo, Board of Governors , Board of Governors – Kevin M. Kevin M. WarshWarsh, Board of Governors , Board of Governors – Janet L. Janet L. YellenYellen, San Francisco , San Francisco

Alternate Members Alternate Members – James B. Bullard, St. Louis James B. Bullard, St. Louis – Thomas M. Hoenig, Kansas City Thomas M. Hoenig, Kansas City – Sandra Pianalto, Cleveland Sandra Pianalto, Cleveland – Eric S. Rosengren, Boston Eric S. Rosengren, Boston – Christine M. Cumming, First Vice President, New YorkChristine M. Cumming, First Vice President, New York

Next Meeting: Dec. 15-16, 2009 still

0 - 0.25% ff rate?


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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 Homework See Homework

Principles of Macroeconomics Spring 2010 Day 8 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” 卜安吉.

Documents

fed presidents

fed banksbuy

fed organization

otherthe fed funds rate

board of governors janet

board of governors jeffrey

board of governors charles

board of governors kevin