Money and Banking
What is the Fed?
 Central bank of the
United States
 Established in 1913
 Purpose is to ensure
a stable economy for
the nation
Structure of the Fed
 Board of Governors – 7 members
appointed by the President; Serve 14 year
terms
 District Banks – 12 banks each
responsible for a district – Memphis/
Millington is in district 8 located in St.
Louis
 Bank for Banks
Where is my Fed?
Structure of the Fed
 FOMC – 12 members (7 Board of Governors,
New York district bank president, and 4
rotating district bank presidents)
 They meet 8 times a year and make decisions
about the growth of the money supply and the
level of interest rates
Fed Functions
 Providing Financial Services
 Bank for banks and bank for federal
government
Check Clearing
Issuing Currency - Fed issues and the
Bureau of Engraving and Printing
actually prints
Fed Functions
 Supervising and Regulating Banks
 Regulation is the rules that define what is
acceptable behavior and bank supervision is
enforcement of these rules
Fed Functions
 Conducting Monetary Policy – actions
taken by the Fed to ensure that the
economy is working at its best, not having
inflation or a recession
 (controlling the money
supply)
Monetary Policy
 Tools:
1. Reserve Requirement
2. Discount Rate
3. Open market operations
Reserve Requirement
 Required amount of money that the bank
has to leave on hand at the bank and
cannot lend out.
 Current RR is 10%
How do banks create money?
Deposit
10% Reserve Requirement Loans Made
$1,000
$100
$900
How do banks create money?
Deposit
10% Reserve Requirement Loans Made
$1,000
$100
$900
$900
$90
$810
The recipient of the $900 loan spends it, and the recipient deposits his money
in a bank. This bank only holds 10% of the money, $90, and the bank proceeds
to loan out the rest of the money, $810. This continues through the rest of the
loans and deposits into banks.
How do banks create money?
Deposit
10% Reserve Requirement Loans Made
$1,000
$100
$900
$900
$90
$810
$810
$81
$729
729
$72.90
$656.10
$656.10
$65.61
$590.49
$590.49
$59.05
$531.44
$531.44
$53.14
$478.30
When all the money has been deposited, loaned out, re-deposited, re-loaned
out, etc. until there is no more money to loan out, you will arrive at these totals
$10,000
$1000
$9,000
Conducting Monetary Policy
Reserve Requirement
 Reserve Requirement – Up
 Money Supply – Down
(contractionary/tight
monetary policy)
 Reserve Requirement –
Down
 Money Supply – Up
(expansionary/loose
monetary policy)
Conducting Monetary Policy
Interest Rate is the price you pay to borrow or the price
you charge for a loan
Discount Rate
 Discount Rate – Up
 Money Supply – Down
(contractionary/tight
monetary policy)
 GDP?
 Unemployment?
 Discount Rate – Down
 Money Supply – Up
(expansionary/loose
monetary policy)
 GDP?
 Unemployment?
Conducting Monetary Policy
Open Market Operations (Most Common Tool Used) –
Buying and selling of bonds
 Sell Bonds
 Buy Bonds
 Money Supply – Down
 Money Supply – Up
(contractionary/tight
(expansionary/loose
monetary policy)
monetary policy)
 What are three actions the Fed could take
to increase the money supply? When
would they want to do this?
 What are three actions the Fed could take
to decrease the money supply? When
would they want to do this?
Monetary Policy The Federal Reserve System has three
main policy tools at its disposal. It uses these tools to
affect the money supply and interest rates.