Chapter 15 The Fed and Monetary Policy Section 1 p. 255 Terms:

• Member banks• 407 commercial banks that are members of,

and hold stock in, the Fed• Federal Reserve organized in 1913 as a

corporation • Issued stock• National banks MUST belong• State banks have option to join.

Bank holding companies

• 410 corporations that own one or more banks.

• Do not accept deposits or make loans• Stock for a bank is usually sold by the holding

company• Bankers created holding companies to get

around New Deal bank regulations during the Great Depression.

Regulation Z

• 411 the Fed has the authority to extend truth-in-lending vouchers to millions of individuals who borrow from

• Corporations• Retail stores• Automobile dealers• Banks• Lending institutions

currency

• 413 the paper component of the money supply.

• Denominations are printed by the Bureau of Engraving

• stored in reserve district banks

coins

• 413 metallic forms of money• Pennies• Nickels• Dimes• Quarters• Half-dollars• Sacagawea, Susan B. Anthony, “presidents”

dollar • Provide them to banks as needed.

Section 2 p. Terms:

• Monetary policy• 415 is the expansion or contraction of the

money supply by the Fed in order to…..• Influence the cost and availability of credit.• Note: – more credit – stimulate spending– Less credit – fight inflation, decrease spending

Fractional reserve systems

• 415 requires banks and other depository institutions to keep a fraction of their deposits in the form of legal reserves.

Legal reserves

• 415 coins and currency that depository institutions hold in their vaults

• Plus deposits with Federal district banks

Reserve requirement

• 415 a rule stating that a percentage of every deposit be set aside as legal reserves.

• Fed changes the reserve requirement as needed.

• Note:• Fed Raises: to slow spending and inflation• Fed Lowers: to stimulate spending• Go to page 421….. (use exam graph on proj.)

Excess reserves

• 416 legal reserves over the reserve requirement.

• The bank can loan these funds

liabilities

• 416 debts and obligations to others

assets

• 416 properties, possessions, and claims on others

Balance sheet

• 416 a condensed statement showing all assets and liabilities at a given date.

• It reflects • Net worth• The excess of assets over liabilities• The measure of the value of a business

liquidity

• 417 the potential to be converted into cash in a very short time.

• Helps banks serve their customers• Ex: bank can sell its bonds to raise cash to

loan to customers.

Savings account/time deposit

• 417 interest bearing deposits that cannot be withdrawn by check.

• Prior notice must be given to release a time deposit.

Member bank reserve

• 418 aka “MBR”• A deposit a member bank keeps at the Federal

Reserve to meet reserve requirements.

Easy money policy

• 419 the Fed allows the money supply to grow and interest rates to fall.

• Goal is to stimulate the economy.• Low interest rates encourage people to buy on

credit.• Businesses will borrow more money as well.

Tight money policy

• 419 The Fed restricts the growth of the money supply

• Drives interest rates up; making it more expensive to borrow money.

• Consumers and businesses spend less• Keeps inflation rate low.

Open market operations

• 420 the buying and selling of government securities in financial markets

• Another tool of the Fed• Selling more securities:– decreases the money supply– Pushes up interest rates

• Buying up securities– increases money supply– Interest rates decrease

Discount rate

• 319 the interest rate the Fed charges financial institutions when they borrow.

• Another monetary tool of the Fed• High DR = lower borrowing and spending• Low DR = higher borrowing and spending

Margin requirement

• 423 minimum deposits left with a stockbroker to be used as down payment to buy other securities.

• Another Fed tool.• Low MR = more money, more borrowing• High MR = less money, less borrowing

Moral suasion

• 424 another Fed tool– Fed makes public announcements• Magazine/newspaper articles• Testimony before Congress• Press releases

• To motivate or convince banks to behave a certain way.

Selective credit controls

• 424 Another Fed tool:• credit rules pertaining to particular

commodities or purposes• Used in WWII to reduce consumer production

by factories– Increase military production

Hwk Assessments, Class Work, to Know

Assessments: section 1, Checking for Understanding

• 1• To provide financial services to the

government• Regulate financial institutions• Maintain the payments system• Enforce consumer protection laws• Conduct monetary policy

• 3• Member banks

– contribute a small amount of funds to the Fed– receive ownership shares in return– Select directors for each of the 12 district banks

• Overall supervision of the Fed is in the hands of a seven-member Board of Governors– Appointed by the President– Approved/not approved by the Senate

• The Board– Dominates the Federal Open Market Committee– Makes monetary policy

• Member banks can advise the Board through the Federal Advisory Council– Has one representative for each district bank.

• 4• State member bank supervision• Holding companies• International operations• Mergers• Check clearing• Consumer legislation• Currency• Margin requirements• Maintain currency and coin

Assessments: section 2, Checking for Understanding

• 1• To influence the cost and availability of credit• To keep the economy healthy

• 3• They are used to control the supply of money

• 4• The reserve requirement determines the

amount of legal reserves a bank has to keep• This determines …..– how much money a bank can lend– the size of the money supply.

• 5 (just identify them, we have the definitions already)

• Reserve requirement• Open market operations• The discount rate

Image, p. 408

• Question• Supervises and regulates the Fed

Image, p. 409

• Question• It sets general policies for Federal Reserve and

member banks to follow• Regulates certain operations of state-

chartered member banks• Conducts some aspects of monetary policy

Image, p. 410• Question• Conducts nationwide auctions of Treasury bills, bonds,

and notes• Issues, services, and redeems these securities on

behalf of the Treasury• Maintains the equivalent of numerous demand deposit

accounts for the Treasury • Clears checks drawn on those accounts• Processes savings bonds• Maintains accounts for IRS• Issues federal agency checks

Image, p. 411

• Question• If the surviving banks is a state member bank,

the Fed must approve the merger.

Image, p. 417

• Question• $80

Image, p. 419

• Question• 419 $10,000

Image p. 421

• Question• $4,000

Image, p. 422

• Question• Changes in the discount rate usually result in

other interest groups

6 Image, p. 423

• Question• Expands• Contracts