Đang tải... (xem toàn văn)
Chapter 22 - Monetary policy and the federal reserve. After completing this unit, you should be able to: Define the concept of money, explain how the fractional reserve banking system allows banks to create money, explain how the market for loans functions, describe the structure of the federal reserve system.
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock Chapter 22 Monetary Policy and the Federal Reserve Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: Camera Press/Redux Pictures PowerPoint Prepared by Z Pan After studying this chapter, you should be able to: Ø Ø Ø Ø Define the concept of money Explain how the fractional reserve banking system allows banks to create money Ø Ø Ø Explain how the market for loans functions Describe the structure of the Federal Reserve System Copyright © 2013 John Wiley & Sons, Inc Ø Summarize the roles of the Federal Reserve Explain how monetary policy takes place Illustrate the impact of monetary policy on the economy Assess the tradeoffs associated with monetary policy THE EVOLUTION OF THE MONETARY SYSTEM Ø Ø Barter Exchange is the trading of goods and services directly for other goods or services, without using money Medium of Exchange is an item that is widely accepted as payment for goods and services Copyright © 2013 John Wiley The Functions of Money The three primary functions of money: (1) medium of exchange; (2) unit of account; (3) store of value Ø Ø A Unit of Account is a standard measure of the value of goods and services A Store of Value is something that can be saved and used at a later time Copyright © 2013 John Wiley THE MONEY SUPPLY Ø Ø The standard definition of money supply is money in circulation called M1 M1 includes: cash, demand deposits, traveler ’s checks, and other checkable deposits Copyright © 2013 John Wiley Money supply in the U.S Copyright © 2013 John Wiley THE BANKING SYSTEM Ø Ø Ø Ø Balance Sheet is a statement of assets (things owned) and liabilities (things owed) Total Reserves are a bank’s deposits that it has received but has not lent out Required Reserve Ratio (rrr) is the percentage of deposits that a bank must hold as reserves by law Required Reserves is the dollar amount that a bank is required to hold as reserves Copyright © 2013 John Wiley THE BANKING SYSTEM Ø Ø Fractional Reserve Banking is a system under which banks are required to hold only a fraction of their deposits as reserves Excess Reserves are the difference between a bank’s total reserves and its required reserves Total reserves = required reserves + excess reserves Copyright © 2013 John Wiley An example of balance sheet Copyright © 2013 John Wiley The market for loans Ø Ø The supply of loans (S) comes primarily from savings accounts As the interest rate increases, the amount of money people decide to save rises The demand for loans (D) comes from individuals and businesses who want to borrow money When the interest rate on loans falls, the demand for loans increases Copyright © 2013 John Wiley 10 Money multiplier in reverse: Money destruction After you made a withdrawal of $5mi Copyright © 2013 John Wiley 18 Bank Regulation Ø Ø Ø A Bank Run occurs when a large number of customers withdraw their deposits from the bank because they worry that their bank might fail Federal Deposit Insurance Corporation (FDIC), 1933 Federal Reserve System Copyright © 2013 John Wiley 19 The Structure of the Federal Reserve System Ø Ø Ø Board of Governors Ø Chair (Ben Bernanke), 4-year terms Ø members, 14-year term 12 Federal Reserve District Banks The Federal Open Market Committee (FOMC), 12 members Copyright © 2013 John Wiley 20 Federal Reserve and Monetary Policy Ø Ø Two primary missions of the Federal Reserve are to promote price stability and to promote employment and economic growth Monetary Policy is the use of regulations or actions by the central bank to influence the money supply Copyright © 2013 John Wiley 21 Monetary Policy Three tools for monetary policy: Ø Open Market Operations Ø Discount Rates Ø Reserve Requirements Copyright © 2013 John Wiley 22 Monetary Policy Ø Ø Ø Open Market Operations are the purchases and sales of federal government securities by the Fed If the Fed ’s objective is to increase the money supply, it will conduct open market purchases of securities from banks and investors If the objective is to decrease the money supply, it will sell securities to banks and investors Copyright © 2013 John Wiley 23 Monetary policy: Open market purchase to increase money supply Initial Status of the bank’s balance sheet: After Fed purchased $10mi securities: Copyright © 2013 John Wiley 24 Monetary Policy Ø Ø Ø Discount Rate is the interest rate that the Federal Reserve charges banks for loans Federal Funds Rate is the interest rate that banks charge one another for loans to cover required reserve shortfalls A higher discount rate discourages banks from borrowing from the Fed and from each other, thus less funds available for loans and less money supply created Copyright © 2013 John Wiley 25 Monetary Policy Ø Ø Ø Ø A third tool of monetary policy is setting reserve requirements Changing the required reserve ratio instantly impacts banks’ excess and required reserves Increasing required reserve ratio will reduce the money supply Decreasing required serve ratio will increase the money supply Copyright © 2013 John Wiley 26 Monetary Policy and the Economy Ø Ø Expansionary Monetary Policy involves Fed actions to increase the money supply Contractionary Monetary Policy involves Fed actions to decrease the money supply Copyright © 2013 John Wiley 27 Impacts of Expansionary Monetary Policy Copyright © 2013 John Wiley 28 Impacts of Contractionary Monetary Policy Copyright © 2013 John Wiley 29 Advantages and Disadvantages of Monetary Policy Ø Ø Advantages: Ø Flexibility Ø Nonpolitical Disadvantages: Tradeoff between fighting inflation & unemployment Ø Ø Market expectations Copyright © 2013 John Wiley 30 Questions/Discussions Describe the actions the Federal Reserve could take to increase the money supply Describe the functions of money How well does cash fit these functions? How well does a checking account that earns zero interest fi t these functions? How well does an interest-earning savings account fit these functions? Copyright © 2013 John Wiley 31 Key Concepts Barter exchange • Medium of exchange • Primary functions of money • Unit of account • Store of value • M1 money supply • Balance sheet • Total reserves • Required reserve ratio • Required reserves • Fractional reserve banking ã Excess reserves ã Money Copyright â 2013multiplier John Wiley • • 32 ... the Federal Reserve are to promote price stability and to promote employment and economic growth Monetary Policy is the use of regulations or actions by the central bank to influence the money... to increase the money supply, it will conduct open market purchases of securities from banks and investors If the objective is to decrease the money supply, it will sell securities to banks and. .. (2) unit of account; (3) store of value Ø Ø A Unit of Account is a standard measure of the value of goods and services A Store of Value is something that can be saved and used at a later time