Chapter 15 Lecture Notes

Chapter 15 Lecture Notes - CHAPTER FIFTEEN THE FEDERAL...

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CHAPTER FIFTEEN THE FEDERAL RESERVE AND MONETARY POLICY INSTRUCTIONAL OBJECTIVES After completing this chapter, students should be able to: 1. Identify the goals of monetary policy. 2. List the principal assets and liabilities of the Federal Reserve Banks. 3. Explain how each of the three quantitative controls may be used by the Fed to expand and to contract the money supply. 4. Prescribe three monetary policies the Fed could use to reduce unemployment. 5. Prescribe three monetary policies the Fed could use to reduce inflationary pressures in the economy. 6. Explain the cause-effect chain between monetary policy and changes in equilibrium GDP. 7. Demonstrate graphically the money market and how a change in the money supply will affect the interest rate. 8. Show the effects of interest rate changes on investment spending. 9. Describe the impact of changes in investment on aggregate demand and equilibrium GDP. 10. Contrast the effects of an easy money policy with the effects of a tight money policy. 11. Identify the federal funds rate and its importance for monetary policy. 12. List four shortcomings and three strengths of monetary policy. 13. Explain the net export effect of an expansionary and a contractionary monetary policy. 14. Define and identify terms and concepts at the end of the chapter. LECTURE NOTES I. Objectives of Monetary Policy A. Reemphasis of Chapter 13’s points: The Fed’s Board of Governors formulates policy, and twelve Federal Reserve Banks implement policy. B. The fundamental objective of monetary policy is to aid the economy in achieving full-employment output with stable prices. 1. To do this, the Fed changes the nation’s money supply. 2. To change money supply, the Fed manipulates size of excess reserves held by banks . II. Consolidated Balance Sheet of the Federal Reserve Banks A. The Fed’s balance sheet contains two major assets. 1. Securities which are federal government bonds purchased by Fed, and 2. Loans to banks. B. The balance sheet contains three major liabilities: 195
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The Federal Reserve and Monetary Policy 1. Reserves of banks held as deposits at Federal Reserve Banks, 2. U.S. Treasury deposits of tax receipts and borrowed funds, and 3. Federal Reserve Notes outstanding, our paper currency. III. Three Major “Tools” of Monetary Policy Open Market Operations, Reserve Ratio, Discount Rate A. Open-market operations refer to the buying and selling of government bonds (follow text diagrams to aid in understanding). 1. Buying securities will increase bank reserves (see Figure 15-1). a. If the Fed buys directly from banks, then bank reserves go up by the price of the securities sold to the Fed. b. If the Fed buys from the general public, people receive check from the Fed when they sell bonds to the Fed and then deposit the check at their bank. Bank customer deposits rise and therefore bank reserves rise by the same amount .
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