The Federal Reserve System & its
Tools (2 days)
AP Macroeconomics
http://www.stlouisfed.org/inplainenglish/reserve_banks.htm
Where we came from…
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Previously, we discussed
financial intermediaries,
which are the go-between
borrowers and lenders.
Financial intermediaries
take deposits from
households and
businesses and make
loans to other households
and businesses.
In essence, they help
money circulate through
the economy.
We also learned about the
money creation process.
http://sparkcharts.sparknotes.com/economics/macroeconomics/section2.php
Where are we going?
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In this lesson, we’ll
learn about the
Federal Reserve
System and how its
actions relate to the
money creation
process.
http://www.writemoneyinc.com/
What is the Federal Reserve?
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The central bank for the
United States, created in
1913.
Holds regulatory
authority for many
financial institutions that
hold checkable deposits.
Controls the money
supply
http://www.stlouisfed.org/inplainenglish/reserve_banks.htm
Control of the Ms does what?
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Promotes the following economic goals:
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Full employment
Price stability
Stable economic growth
How is “The Fed” structured?
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Board of Governors –
oversees the entire system. 7
members appointed by the
President, approved by the
Senate.
12 regional Fed Reserve
Banks serving a Federal
Reserve District. Each run by
a board of directors.
Federal Open Market
Committee – make decisions
about federal monetary
policy. Consists of the Board
of Govs and five of the
regional bank presidents.
At the top is a chairman.
http://www.doctorhousingbubble.com/treasury-federal-reserve-banking-money-structure-bailout-tarp/
To view the 12 regions…
Follow this link:
 http://www.federalreserveonline.org/
A part of, or apart from, the US government?
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Not really a part of the
US government, but it’s
also not a private
institution. Prior, we had
a national banking
system.
Weighing the pros and the cons…
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Pros: In theory, the Fed
is accountable to the
voting public because
members are appointed
by the President and
approved by the
Senate.
Cons: The downside?
They serve long terms,
politically sheltering
them from certain
political pressures.
http://westhollywoodpropertymanagementpros.com/2012/06/08/pros-cons-of-hiring-a-propertymanagement-company/
What is the role of the chairman?
(Alan Greenspan)
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Former chairman was Alan
Greenspan 1987 – 2006.
The chairman is appointed
every 4 years.
The chair can be reappointed.
Current chairman is Ben S.
Bernanke, on his second
term.
Reports to Congress and
testifies to Congress about
monetary policy objectives.
http://www.time.com/time/photogallery/0,29307,1662044,00.html;
http://www.federalreserve.gov/aboutthefed/bios/board/bernanke.htm
(Ben Bernanke)
And now…
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Create a graphic
organizer illustrating the
structure of the Federal
Reserve.
Please include the
primary responsibilities
of each layer.
Feel free to use a
pyramid, spoke
diagram, or any other
GO that works for you!
Homework
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Read Module 26
(Optional) Explore Lessons 9-11 for
enrichment at
http://www.learnbonds.com/lesson/thefederal-reserve-and-interest-rates/ to get a
better grasp of how the Fed functions and
controls the money supply in the U.S.
The Tools & Functions of the Fed
DAY 2
http://www.learnbonds.com/lesson/how-the-fed-influences-interest-rates/
Where we came from…

In a previous lesson,
we learned about the
history, structure, and
roles of the Federal
Reserve System.
http://www.writemoneyinc.com/
Where are we going?

In this lesson, you’ll
learn about the basic
functions of the Fed,
and how those
functions are carried
out, as well as how the
Fed’s actions relate to
the money creation
process.
http://www.learnbonds.com/lesson/the-federal-reserve-and-interest-rates/
Functions of the Fed…
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Provide financial services to banks and other
large institutions.
Supervise and regulate banking institutions,
and to ensure success of nation’s banking
system.
Maintain stability of the financial system by
providing liquidity to financial institutions.
Conduct monetary policy through use of its
tools.
The Tools of the Fed…
1)
2)
3)
Open market
operations: the buying
and selling of Treasury
securities (this is the
primary tool used).
Discount rate: the
interest rate the Fed
charges on loans.
Required reserve
ratio: sets minimum
standard rr for banks.
http://jimmyquetron.studentbs.com/2011/02/21/bank-deposits/;
http://www.ehow.com/info_8163394_fed-influence-monetary-policy.html
More info., please?
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Like banks, the Fed has
assets and liabilities.
Assets consist of debt
issued by the U.S.
government, primarily shortterm U.S. bonds with a
maturity of less than 1 year
(these are U.S. Treasury
bills).
Liabilities consist of
currency in circulation and
bank reserves.
We use a T-account to
understand the Fed’s
normal assets and liabilities.
http://www.finpipe.com/assback.htm
Basic Balance Sheets of the Fed
Left Side:
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Assets
(government
debt)
Right Side:
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Liabilities
(Currency in
circulation +
bank reserves)
Net worth of both sides = Assets - Liabilities
How can changes in reserves changes the
money supply?
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Changes in bank reserves,
caused by open-market
operations, doesn’t directly
affect the money supply.
However, it sets off the
money multiplier!
For example, a $200 million
increase in reserves would
increase the Ms by $200
mil, and then some of that
money would be redeposited, increasing
reserves again, and so on
and so forth.
http://blog.redfin.com/sfbay/2008/04/lowering_your_property_taxes_the_ripple_effect.ht
ml
How does the Fed get the money for their
Treasury bill?
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Remember, the U.S. dollar
is fiat money, and is not
backed by anything.
The Fed, ultimately, can
create additional monetary
base (bank reserves +
currency in circulation) as
it wishes.
What do you think about
this?
http://www.topnews.in/health/thinking-wont-help-you-resist-temptation-213530
The Basis of Monetary Policy
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According to Krugman (as well as other
economists):
“the Fed controls the money supply—checkable deposits plus
currency in circulation. In fact, it controls only the monetary
base—bank reserves plus currency in circulation. But by
increasing or reducing the monetary base, the Fed can
exert a powerful influence on both the money supply and
interest rates.” (p. 266)
This is the basis of MP…
Process it!
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Create a graphic
organizer illustrating the
tools and functions of
the Fed.
And now…
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Some resources:
http://www.reffonomics.com/
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For information on federal reserve banks, you can
visit:
http://www.stlouisfed.org/inplainenglish/reserve_b
anks.htm
Morton workbook: NO ACTIVITY DUE AT THIS TIME
Please complete Krugman Module 27 questions
Works Cited
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Economics of Seinfeld.
http://yadayadayadaecon.com/
Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York: Worth
Publishers.
Morton, John S. and Rae Jean B. Goodman.
Advanced Placement Economics: Teacher
Resource Manual. 3rd ed. New York: National
Council on Economic Education, 2003. Print.
Reffonomics. www.reffonomics.com.