The FED and
Monetary
Policy
The Federal Reserve Bank
(the Fed)
 Federal
Reserve Act passed in 1913
 Goal was to create safer, more stable monetary
and banking system
CHAIRMAN OF THE BOARD
Dr. Janet Yellen
When she talks, people listen.
Chairman of the Board
Structure of the FED
 The
FED functions as a central bank…they
are the watchdog of our nation’s $
 12 District Banks set up in 12 cities around
the country
 Set interest rates and regulates amount of
money and credit in economy (avoid
1929)
Main Resposibilities…
1. Provides financial institutions with currency
and coin…it also processes checks and takes
care of electronic payments
2. Promotes safety within our banking system
 Emerging
democracies (new countries)
have used the Fed as a model
Fiscal vs. Monetary Policy
 Fiscal
Policy = gov’t power to tax and
spend…to get a stagnant economy
moving again or to address inflation
**Congressional Responsibility
 Monetary Policy = a central bank’s
control over the money supply and
interest rates
** no government involvement
FOMC
 The
Fed’s open-market operation (most
used tool)
 Fed sells securities/bonds on the market
 people pay for them with $ taken out of
the banks, thus shrinking the $ supply
Warm Up 1/13/17
Name something the FED can do to either
increase or decrease the money supply in
the economy.
What is the difference between fiscal and
monetary policy?
Fractional Reserves
 Fractional
reserve banking – the term is
the definition…..bank keeps a % of
deposits in reserve and makes loans with
the rest.
 expand the money supply if slipping into
recession.
 decrease the money supply if they think
rising prices will threaten to trigger
inflationary wage price spiral.
3 tools of the FED
 Control


higher rates = tight money supply
Lower rates = loose money supply
 Open


Market Operations (FOMC)
Sells bonds/securities on NYSE = tight money
Buys bonds/securities = loose money
 Reserve


interest rates
Requirement
Banks have higher Reserve Req= tight money
Lower reserve req = loose money
Warm-up 1/14/15
What are the three tools the FED can use to
influence the money supply?
What is tight money policy and what is
loose money policy?
Reserve Requirement
 One
of Fed's tools for promoting healthy
economy is through setting the reserve
requirements
 RESERVE
REQUIRMENT: % of deposits that
must be set aside by a bank


Banks may not lend these required reserves.
Extra Reserves = EXCESS RESERVES

Can be loaned out to customers
1. If $1,000 is deposited in the bank, calculate how much the bank must hold
in reserve for each of the following reserve requirements. How much is the
required reserve?
A. 1%___________ C. 10% ___________ E. 15% ____________
B. 5% ___________ D. 12.5%___________ F. 25% ____________
2. If $1,000 is deposited in the bank, calculate how much the bank can lend for
each of the following reserve requirements. How much is the excess reserve?
A. 1%___________ C. 10% ___________ E. 15% ____________
B. 5% ___________ D. 12.5%___________ F. 25% ____________
Money is created when the bank makes loans to
customers.
The reserve requirement is 10 % , bank will lend all
of its excess reserves.
Total New Deposits Column _____________ = M1: banks money supply
Account Holder
New Deposits
A. Eric
$1,000.00
B. Juan
$900.00
C. La Tandra
$810.00
D. Angie
E. Huang Suk
Required Reserves
Excess Reserves
$900.00
$90.00
$72.90
$590.49
The money multiplier determines how much
money can be created in the economy from an
initial deposit. The formula for the money
multiplier is:
In this example, the Federal Reserve set the reserve
requirement at 10 percent. So the money multiplier in
this example would be:
To find out the total increase in the money supply, the formula is:
Total increase = Multiplier x deposit
The multiplier is 10 and the deposit is $1,000. So the total increase of the
money supply would be:
Total increase = 10 x $1,000 = $10,000
To find out how much money can be created following an initial deposit, the
formula is:
Expansion of the Money Supply = Multiplier x Excess Reserves
4. Calculate the money multiplier for each of the following reserve requirements.
A. 1% ___________ C. 10% ___________ E. 15% ____________
B. 5% ___________ D. 12.5%___________ F. 25% ____________
5. If a bank holds $1,000 in excess reserves, calculate the total amount of money that
could be created for each of the following reserve requirements.
A. 1% ___________ C. 10% ___________ E. 15% ____________
B. 5% ___________ D. 12.5% __________ F. 25% ___________
You make the call…
If the Reserve Requirement increases from 10% to
12%, what does that do to the money supply?
If the reserve requirement decreases from 10% to
7%, what does that do the money supply?
Which represents a loose money policy and which
represents a tight money policy?
Connections Chart
 Time to put it all together…
GDP
 BUSINESS CYCLE
 FEDERAL RESERVE SYSTEM
 MONETARY POLICY
 FISCAL POLICY
Each listed above are part of measuring and regulating our
money supply and overall health of the economy.
Create a chart that explains the following for each:
1.
Define each
2.
Explain main goals/tools/measures on the health of the
economy (ex. If it is this…. It means this …)
3.
Make a connection to each of the others on the list…

Economic
Indicator
GDP - Gross
Domestic
Product
Definition
Measures
amount a
country
produces in 1
year
Measures/Tools
Connection
When the GDP
is high, it means
the economy is
strong, when
GDP is low
economy is
weak.
High or rising GDP,
means an
expansion or peak
in business cycle,
which means the
FED can begin use
tools to tighten or
slow monetary
policy and
Congress will use
fiscal policy such
as less tax breaks to
help slow down
economy