The Federal Reserve and Monetary Policy
Structure of the Fed
#1
Why are members of the Board of Governors appointed for such
long terms?
(HINT: Think about Supreme Court Justices!)
#2
Decisions about monetary policy are made by the Federal Open
Market Committee, which consists of: Board of Governors, NY
Fed president, four other regional bank presidents (rotating)
Why don’t other members of the government serve on this
committee?
(HINT: Consider the reasons for the “pseudo-governmental”
nature of the Fed)
#1
#3
Functions of the Fed
#2
#4
Tools of Monetary Policy
#1
How would changes to the reserve requirement tighten or loosen
the money supply?
#2
How would changes to the discount rate (i.e., reducing the gap
between the fed funds rate and discount rate to just .25% as the
Fed did in 2008) tighten or loosen the money supply?
(HINT: What happens to the opportunity cost of banks being
short on reserves?)
#3
How would open-market operations tighten or loosen the money
supply?
(HINT: What happens to the banks’ reserves when the Fed buys
or sells T-bills to them?)
Fed Policy Actions
Why is it important to factor in the money multiplier when we
consider the impact of Fed policy actions? Does it apply to the
use of all three tools?