Chapter 15.  Over 30,000 different currency  Anyone could create currency  Some currencies worth more than others  Some banks didn’t keep enough reserve

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    17-Jan-2018

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Board of Governors Directs the operations 7 full time members Appointed by Pres approved by Senate 14 year term new member every 2 years Decisions not approved by anyone Federal Advisory Council 12 members chosen by directors of each bank Meets 4 times a year reports directly to BoG Federal Open Market Committee Meet 8 times a year Controls Money Supply Made up of 7 BoG, head of NY Fed Bank, 4 other bank heads rotate 12 District Banks 25 Branch Banks Most other banks and lending institutions

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<p>Chapter 15 Over 30,000 different currency Anyone could create currency Some currencies worth more than others Some banks didnt keep enough reserve to do everyday banking of customers Banks constantly going BANKRUPT Congress creates The Federal Reserve Bank (THE FED) in 1913 Board of Governors Directs the operations 7 full time members Appointed by Pres approved by Senate 14 year term new member every 2 years Decisions not approved by anyone Federal Advisory Council 12 members chosen by directors of each bank Meets 4 times a year reports directly to BoG Federal Open Market Committee Meet 8 times a year Controls Money Supply Made up of 7 BoG, head of NY Fed Bank, 4 other bank heads rotate 12 District Banks 25 Branch Banks Most other banks and lending institutions U.S. divided into 12 Federal Reserve Districts Each district has one Fed Reserve Bank Set up as corporation with member banks as owners 25 Branch banks assist in carrying out duties All national banks must join State banks have choice Advantages: Stockholders of district bank Receive Dividends Vote for 6 of district banks 9 board members Check Clearing Governments Fiscal Agent Supervising Banks Holding Reserves and Setting Reserve Requirement Supplying Paper Currency Regulating the Money Supply Main function Affects interest rates for borrowers Affects availability of credit Affects business activity Monetary Policy Changing the rate of growth of the money supply in order to affect the cost and availability of credit Cost of Credit Interest paid As cost goes up??? As cost goes down??? Loose Money Policy (AKA Expansionary) Lots of credit Credit is cheap Consumers buy more Businesses expand More employment Tight Money Policy (AKA Contractionary) Difficult to get credit Cost more to borrow Businesses postpone expansion Unemployment increases Reduction in production Fed sets Reserve Requirement Amount of checkable deposits that must be in reserve at all times Held in case customers want to withdraw funds Currently 10% Rest of money is used to create New Money Board of Governors can do 3 things to control money supply Changing Reserve Requirement Changing Discount Rate Open Market Operations Raising the Reserve??? Less money (deposits) available to loan out Used to slow economy if too much spending Lowering the Reserve??? More money (deposits) available to loan out More loans means more in supply Consumers can spend more Banks may have to borrow from the Fed If goes below Reserve Requirement Customers borrowing Customers withdraw Fed charges Discount Rate (Interest) to banks If Discount Rate High??? Banks charge higher interest to customers Customers/Businesses likely wont borrow Lowering the Discount Rate??? Banks charge lower interest to customers Customers/Businesses will borrow at this times Can also alter the Federal Funds Rate Rate that banks charge when lending to each other When do banks borrow from each other??? Buying/Selling Treasury Bonds, Notes, Bills How does this alter Money Supply? Government buys securities Deposits money into dealers bank Bank then keeps RR and loans rest out Increases Money Supply Government sells securities Dealers banks must use deposits to purchase Banks have less money above reserve so less loans Decreases Money Supply No matter what tool used Takes about 12 months before fully felt Criticisms of Fed Policies Have caused higher than necessary inflation because improperly increasing money supply Has made recessions worse by causing tight money policy when economy already contracting Some people call for The Fed to increase money supply by same amount each year (steady inflation) Tax policies of Federal Government can also affect The Fed policy Sometimes work against each other</p>