Lecture 10 - Lecture10 .,thesupply

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Lecture 10 This chapter describes the roles of the Federal Reserve.  As the money is a medium of exchange, the supply  of money that the Fed can influence through their policies is an important considerations in our economy. The Role of the Federal Reserve System The Federal Reserve System sets  monetary policy , management of the money supply for the purpose of  maintaining stable prices, full employment, and economic growth.  Three tools that the Fed can employ to achieve its monetary policy: 1. open market operations, the primary tool 2. the discount rate, the secondary tool 3. reserve requirement, the secondary tool The Fed uses these monetary tools to expand or contract the supply of money to pursue the economic goals  of prosperity with full employment and stable prices.  “easy” monetary policy – an increase in the supply of money and credit to help expand the level of income  and employment “tight” monetary policy – a contract in the supply of money and credit to fight inflation Other roles of the Fed can be illustrated through its balance sheet and its items. Gold certificates  – asset which represents warehouse receipts issued by the treasury for gold it holds.  The  origin of the gold certificates goes back to the Gold Reserve Act of 1934.  The Act required a dollar’s  worth of gold for every dollar in Federal Reserve notes to be held in vaults.  (Remember Die Hard 3  movie?) However, this has been changed over time, and now the public’s faith in the purchase power of the money  supply “backs” the currency.  The major asset of the Fed is the debt of the federal government which is bought and sold by the Fed  through open market operations.  This purchase and sales change the money supply and the ability of banks  to create credit and are the most important tool of monetary policy.  The remaining assets include  cash items in process , checks that have not cleared, and loans to banks.  Float  – checks in the process of clearing that are simultaneously counted as deposits in two banks.  As  such, the longer floats can have expansionary effects. The loans to banks are loans made to depositary institutions that face the difficulty in meeting the reserve  requirements.  The cost of loans from the Fed is the discount rate.  The largest liability of the Fed is the paper currency held by the general public ( Federal Reserve notes ).  Other liabilities include deposits from banks, the Treasury, and foreign financial institutions.  Therefore,  the Fed is acting as the depository institution.  Of these, bank reserves is the most important as this can be 
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