The Federal Reserve System

1. The Federal Reserve System Ch. 15 J. Johnson SP09

2. 15.1 • Describe the structure of the Federal Reserve System. J. Johnson SP09

3. The FED • It affects us ALL!!! • owned by its member banks. • The Board of Governors establishes policies for the Federal Reserve and member banks to follow, regulates certain operations, and controls the money supply. • The 12 Federal Reserve district banks and 25 branch banks are located near the commercial banks they serve. J. Johnson SP09

4. The Federal Open Market Committee (FOMC) • The Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council advise the Board of Governors. J. Johnson SP09

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6. Regulatory Responsibilities • Monitors member banks’ reserves. • Oversees foreign banks operating in the United States as well as the international operations of U.S. member banks and holding companies operating abroad. • Approves bank mergers. • Responsible for check clearing. J. Johnson SP09

7. responsible for issuing paper currency. • responsible for providing financial services to the federal government. J. Johnson SP09

8. 15.1 Quiz • 1) ____ __ ________ establishes policies for the Federal Reserve and member banks to follow, regulates certain operations, and controls the money supply. • 2) The ___ Federal Reserve district banks and ____ branch banks are located near the commercial banks they serve. • 3) _____ _____ _____ ____makes decisions about the growth of the money supply. • 4) What does it mean to be a member of FDIC? • 5) Name 1 regulatory responsibility of the FED J. Johnson SP09

9. 15.2 • Describe the use of fractional reserves. • Understand the tools used to conduct monetary policy. J. Johnson SP09

10. Monetary Policy • The most important job of the fed is….. • Monetary policyis the expansion or contraction of the money supply in order to influence the cost and availability of credit. • Changes interest rates whenever the economy’s health is threatened. J. Johnson SP09

11. DID U NO? • Every piece of paper money issued in the United States has the name of one of the 12 Federal Reserve banks on it. Most money in a region will bear the name of the closest Federal Reserve bank. J. Johnson SP09

12. Fractional Bank Reserves • Requires that member banks keep a certain percentage of their deposits in the form of legal reserves. • Every time a bank customer makes a deposit, the bank must set aside a portion of the deposit as reserves. • Banks earn money by lending out that portion of their deposits that need not be held as reserves. J. Johnson SP09

13. To earn its profits, a bank usually needs to charge 2-3 percent more for its loans than the rate of interest it pays for its saving accounts and time deposits, interest bearing deposits that cannot be withdrawn by check. J. Johnson SP09

14. Fractional Reserves and Monetary Expansion • A system of fractional reserve banking allows banks to make a large volume of loans. • A change in the money supply = the change in reserves/reserve requirement. J. Johnson SP09

15. Tools of Monetary Policy • The Fed can affect the money supply by changing the reserve requirement. • Can affect the money supply by buying and selling government securities (open market operations). • can affect the money supply by changing the discount rate, the interest rate the Fed charges on loans to financial institutions. • can affect the money supply by changing margin requirements. • can affect the money through moral suasion and selective credit controls. J. Johnson SP09

16. Let’s Review Describethe relationship between the reserve requirement, reserves, and the size of the money supply. A) The reserve requirement determines the amount of legal reserves a bank has to keep, which then determines how much money a bank can lend and the size of the money supply. J. Johnson SP09

17. Describethe three major tools of monetary policy. A) The three major tools of monetary policy are reserve requirements, open market operations, and the discount rate. J. Johnson SP09

18. 15.3 • Explain how monetary policy affects interest rates in the short run.  • Identify the two major definitions of money.  • Describe how interest rates are affected by political pressure. J. Johnson SP09

19. Short-Run Impact • In the short run, monetary policy affects interest rates and the availability of credit. In the long run, it affects inflation and economic growth, which is one of the Fed’s major concerns. • Change in money supply = affects interest. J. Johnson SP09

20. Long Run • Changes in the money supply affect the general level of prices. • Monetizing the government’s debt = creating enough extra money to offset deficit spending in order to prevent interest rates from changing. • The real rate of inflation is the market rate of interest minus the rate of inflation. J. Johnson SP09

21. Other Monetary Policy Issues • A tight monetary policy can hurt some industries, like homebuilding and automobiles, more than other industries. • High interest rates encourage people to forgo consumption today and increase their savings. • Low interest rates encourage people to borrow money today, which will reduce their ability to consume in the future. J. Johnson SP09

22. M1 includes traveler’s checks, coins, currency, demand deposits, and other checkable accounts. • M2 includes M1 plus small denomination time deposits, savings deposits, and money market funds. J. Johnson SP09

23. The Politics of Interest Rates • The FED = Independence • Political Pressure to lower interest rates. • PRES and Congress pick new BofG. J. Johnson SP09

24. Chapter 15 Assessment • KEY TERMS and REVIEWING FACTS on page 434 J. Johnson SP09

25. 17.1 • Explain the importance of international trade in today’s economy. • Describe the basis for international trade. • Explain why total world output increases when countries specialize to engage in trade. J. Johnson SP09

26. If you did not finish 17.1 you have until 10:45 to finish. • Break in to groups. J. Johnson SP09

27. COMPLETE: • Graphic Organizer on pg. 467 J. Johnson SP09

28. The U.S. and International Trade • Exports—the goods and services that it produces and then sells to other nations. • Nations trade because they believe the products they receive (imports) are worth more than the products they sell (exports). J. Johnson SP09

29. The Basis for Trade • Absolute advantage: • whenever it is able to produce more of a given product than another. • comparative advantage • Each country must produce more of the good in which it has a comparative advantage and then exchange the extra output for the extra output of its trading partners J. Johnson SP09

30. 17.2 • Explain how international trade can be restricted to protect special interests. • Cite the main argument used in support of protection. • Relate the history of the free trade movement. J. Johnson SP09

31. Restricting International Trade • Major ways of restricting trade: • tariff- tax placed on imports, and a quota, a limit on the quantities of a product that can be imported. • Protective tariff- one that is high enough to protect less efficient domestic industries. • Revenue tariff- one high enough to generate revenue. J. Johnson SP09

32. Quotas are used to reduce the supply of a product and keep prices high for domestic producers. • Protectionists • people who favor trade barriers that protect domestic industries and offer various arguments to defend their position. J. Johnson SP09

33. The Free Trade Movement • Trade barriers work only if other countries do not retaliate, causing all countries to suffer. • The World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA) are examples of international agencies for promoting freer trade. J. Johnson SP09

34. 17.3 • Explain how foreign currency is used in trade.  • Describe the problem of a trade deficit and the main solution to the problem. J. Johnson SP09

35. Complete the Following Venn-Diagram J. Johnson SP09

36. Foreign Exchange • Foreign exchange is the buying and selling of the currencies of different nations.  • The foreign exchange rate is the price of one country’s currency in terms of another country’s currency. • USD GBP CAD EUR AUD • USD 1 1.98 1.00 1.47 0.88 • GBP 0.50 1 0.51 0.74 0.44 • CAD 0.99 1.96 1 1.46 0.87 • EUR 0.67 1.34 0.68 1 0.59 • AUD 1.13 2.24 1.14 1.67 1 • 1/2/08 J. Johnson SP09

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38. Exchange rates are fixed or flexible. • Fixed = No Change in Rate. • Flexible exchange rates, commonly used today, establish the value of each currency through the forces of supply and demand. J. Johnson SP09

39. Trade Deficits and Surpluses • a trade deficit or surplus depends in part on the international value of its currency. • A weaker dollar buys fewer foreign goods. • QUESTION TIME: • When would it be most economical for Americans to travel abroad: when the dollar is weak or when it is strong? Why? J. Johnson SP09

40. Fill in missing boxes J. Johnson SP09

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42. Complete 17 Review pg 488 • Key Terms and Reviewing Facts J. Johnson SP09