Chapter 14-borrowed

Monetary policy. *Monetary policy allows the Federal Reserve to stabilize the macroeconomy somewhat.

Shift the aggregate demand curve. *Monetary policy is a tool that the Federal Reserve uses to try to achieve its macroeconomic goals.

7 members, appointed for 14 year terms. *Long, fourteen year terms result in a Fed that is politically independent since their terms span three and a half presidential terms.

Appointed by the president and confirmed by the Senate. *The Fed is a quasi government institution, requiring the members of the Board of Governors to be appointed through the political process.

Make their decisions based on economic, rather than political, considerations. *An independent Fed requires insulation from the political process, so that what is best for the economy is pursued, rather than what is good for an election year.

Ben Bernanke. *Ben Bernanke was appointed to be the chairman of the Fed by former president George W. Bush in January 2006.

The Federal Open Market Committee *The FOMC plays the very important role of setting short term interest rates and setting the level of reserves held by private banks.

Required reserves. *The Fed requires banks to hold a certain percent of all deposits as reserves called required reserves.

Taxes. *Setting the level of taxes is an important fiscal lever controlled by the U.S Congress and President.

Bank reserves in excess of required reserves. *Total reserves equal required reserves plus excess reserves.

1 ÷ (required reserve ratio) *The money multiplier tells us how much money creation will result from each dollar of deposits.

$25 billion. *If the reserve requirement is changed to 20 percent, the banking system will now only need $20 billion in reserves versus the $25 billion needed with a 0.25 required reserve ratio, so banks will have excess reserves of $5 billion; this will allow for new loans of $25 billion, since the money multiplier is 5.

One bank lends to another bank. *When a bank is deficient in reserves, it can go to the federal funds market to borrow what it needs from another bank.

Discount rate. *Traditionally, the Fed will lend to member banks at an interest rate known as the discount rate, which is an overnight loan allowing member banks to meet the minimum level of required reserves.

Lending reserves to private banks. *An overnight loan made to a bank by the Fed allows the bank to meet the minimum level of required reserves and is known as discounting.

It signals the Federal Reserve's desire to restrain money growth *A higher discount rate discourages borrowing from the Fed, slowing the growth in the money supply.

Reserves increase for the bank. *When a bank borrows money from the Fed, the bank's balance sheet has an equal increase in liabilities which includes loans from the Fed and assets which includes the additional reserves.

Incentive for banks to borrow reserves. *Changing the discount rate impacts the costs of funds for banks which alters the overall level of lending in the economy, and therefore the money supply.

Open market operations *Open market purchases and sales of bonds alter the amount of reserves on banks balance sheets, thereby altering the amount of money they can lend and create; it is the main policy lever used by the Fed.

Buys securities. *When the Fed buys securities, reserves are injected directly into banks in exchange for their bonds, making more loans possible.

Lower the discount rate. *By lowering the discount rate, the Fed encourages banks to borrow more from the Fed, thereby increasing reserves and lending capacity.

Increases by $500 million. *The money multiplier is equal to 1 ÷ required reserve ratio, which allows a $50 million injection to support $500 million in additional lending capacity.

True

$150

a bond

6.7%

decrease taxes

48.4

Raise taxes