Outline 4 - Professor Akacem UNIT FOUR: Outline number 4...

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Professor Akacem UNIT FOUR: Outline number 4 The Federal Reserve System Chapter 19 I. Role of a Central Bank a. Control of Money b. Regulation of Commercial Banks c. Lender of last resort d. Bankers' bank e. acts as a government's bank f. In some countries, the CB makes loans to the government II. Federal Reserve System a. Federal Reserve Banks (12) b. Board of Governors (7) c. Federal Open Market Committee d. Finances of the Federal Reserve system III. Federal Reserve Bank's Independence: a. Most independent agency b. Case For c. Case Against
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Professor Akacem Unit Four: Outline Four The Federal Reserve System Chapter 19 Optional Reading: An excellent source is "The Federal Reserve System: Purposes and Functions" By: The Board of Governors of the Federal Reserve System, Washington, D.C. 1994. To get a free copy, click here . This will take you to the board's site and you can download it or print. It is about 120 pages. An excellent reference on Glass Steagall, the man who shaped the Federal Reserve can be found in: "Carter Glass", in The Region , Volume 11, Number 4, December 1997. You can either visit the site of the Minneapolis Fed or try our library. I. Role of a central Bank II. The Federal Reserve System III. Federal Reserve Bank's Independence I. Role of the Central Bank : a. The Control of Money: When we talk about the control of money, we are referring to the Money Supply as defined in Unit One . One of the Federal Reserve's duties is to control the growth of the money supply. The Federal Reserve tries to affect the amount of money that circulates in the economy with the ultimate goal of achieving full employment. Changes in the money supply have powerful effects on interest rates and thus on the economy as a whole. The goal is not to let the Money Supply grow at a fast rate or else inflation will ensue. But the Federal Reserve cannot let the Money Supply grow at a too slow of a rate or the economy will slip into a deflation . The Federal Reserve essentially tries to hit the right rate of growth of the money supply but it is not an easy task as you will see later. The assumption is that we do have a relationship between changes in the money supply and GDP (Gross Domestic Product). We also assume that we do have a relationship between changes in the Money Supply and prices (inflation or a measure of inflation). However, these relationships are not stable over time. For example, Chairman Greenspan in 1993 said in a testimony to a Congress: "The historical relationships between money and income , and between money and the price level have largely broken down, depriving the aggregates (meaning M1 , M2 , etc. ..) of much of their usefulness as guides to policy." (See: "Understanding The M's In Monetary Policy", Federal Reserve Bank of New York , 1994, pp.: 8.) This does not mean that the Fed does not look at these aggregates. It does. It simply highlights the complex nature of monetary control. The Fed looks at all kinds of data that it collects and tries to establish trends and get a "fix" as to
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This note was uploaded on 03/17/2008 for the course ECON 4111 taught by Professor Kaplan,jul during the Spring '06 term at Colorado.

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Outline 4 - Professor Akacem UNIT FOUR: Outline number 4...

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