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Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Economics 202Principles Of MacroeconomicsProfessor Yamin AhmadSupplemental Notes to Monetary Policy• The Federal Reserve System• Controlling the Quantity of Money• Modeling Money: The Money MarketProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Federal Reserve System• The Federal Reserve System, or the Fed, is the central bank of the United States.•A central bank is the public authority that regulates a nation’s depository institutions and controls the quantity of money.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Fed’s Goals and Targets• The Fed conducts the nation’s monetary policy, which means that it adjusts the quantity of money in circulation. • The Fed’s goals are to keep inflation in check, maintain full employment, moderate the business cycle, and contribute to achieving long-term growth.• In pursuit of its goals, the Fed pays close attention to interest rates and sets a target that is consistent with its goals for the federal funds rate, which is the interest rate that the banks charge each other on overnight loans of reserves.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Structure of the Fed• The key elements in the structure of the Fed are: The Board of Governors The regional Federal Reserve banks The Federal Open Market Committee.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Federal Reserve System• The Board of Governors has seven members appointed by the president of the United States and confirmed by the Senate.• Board terms are for 14 years and overlap so that one position becomes vacant every 2 years.• The president appoints one member to a (renewable) four-year term as chairman.• Each of the 12 Federal Reserve Regional Banks has a nine-person board of directors and a president.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Federal Reserve SystemFigure 1 shows the regions of the Federal Reserve System.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Federal Reserve System• The Federal Open Market Committee (FOMC) is the main policy-making group in the Federal Reserve System.• It consists of the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and the 11 presidents of other regional Federal Reserve banks of whom, on a rotating basis, 4 are voting members.• The FOMC meets every six weeks to formulate monetary policy.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Federal Reserve System• The Fed’s Power CenterIn practice, the chairman of the Board of Governors (since 1987 Alan Greenspan) is the center of power in the Fed. He controls the agenda of the Board, has better contact with the Fed’s staff, and is the Fed’s spokesperson and point of contact with the federal government and with foreign central banks and governments.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Fed’s Policy Tools• The Fed uses three monetary policy tools: Required reserve ratios The discount rate Open market operationsProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesFormal Structure of the Federal ReserveBoard of GovernorsSeven members appointed by the president of the United States and confirmed by the SenateTwelve Federal Reserve Banks (FRBs)Each of the nine directors who appoint president and other officers of the FRBAround 4800 member commercial banksFederal Open Market Committee (FOMC)Seven members of Board of Governors plus presidents of FRB of NY and four other FRBs. Federal Advisory CouncilTwelve Members (bankers)Appoints three directors to each FRBElects six directors to each FRBReserveRequirementsOpen MarketOperationsDiscountRateFederal Reserve systemSets (within limits)Policy ToolsReviews and DeterminesDirectsEstablishSelectProfessor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Federal Reserve System• The Fed sets required reserve ratios, which are the minimum percentages of deposits that depository institutions must hold as reserves.• The Fed does not change these ratios very often.• The discount rate is the interest rate at which the Fed stands ready to lend reserves to depository institutions.•An open market operation is the purchase or sale of government securities—U.S. Treasury bills and bonds—by the Federal Reserve System in the open market.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesThe Fed’s Balance Sheet• On the Fed’s balance sheet, the largest and most important asset is U.S. government securities.• The most important liabilities are Federal Reserve notes in circulation and banks’ deposits.• The sum of Federal Reserve notes, coins, and banks’ deposits at the Fed is the monetary base.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesControlling the Quantity of Money• How Required Reserve Ratios Work An increase in the required reserve ratio boosts the reserves that banks must hold, decreases their lending, and decreases the quantity of money.• How the Discount Rate Works An increase in the discount rate raises the cost of borrowing reserves from the Fed and decreases banks’ reserves, which decreases their lending and decreases the quantity of money.Professor Yamin Ahmad, Principles of Macroeconomics – ECON 202Note: These lecture notes are incomplete without having attended lecturesControlling the Quantity of Money• How an Open Market Operation WorksWhen the Fed


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UWW ECON 202 - Principles Of Macroeconomics

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