chapter 15 - CHAPTER 15 MONETARY POLICY Chapter Outline History Structure of the Federal Reserve System Functions of the Federal Reserve Tools of

chapter 15 - CHAPTER 15 MONETARY POLICY Chapter Outline...

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CHAPTER 15: MONETARY POLICYChapter Outline:History & Structure of the Federal Reserve System Functions of the Federal ReserveTools of Monetary Policy Open Market Operations Change in the Discount Rate Change in the Required Reserve Ratio Summary of Monetary Policy Tools Impacts of Monetary Policy on the Economy The Loanable Funds Market Monetary Policy and Interest Rates The Impact of Monetary Policy on the Economy The Federal Reserve is the United States Central Bank. It is probably themost powerful, yet least understood, organization in our economy. Its actionsmay affect everyday consumers whenever we purchase things on credit, takeout a loan, or feel the effects of inflation or unemployment. We will examinethe history, structure, and operations of the Federal Reserve.Functions of the Federal Reserve include:1.check collection and clearing;2.holding bank reserves;3.acting as a fiscal agent of the federal government;4.supervising financial intermediaries;5.providing and controlling the money supply;6.being the lender of last resort.*The role of the Fed is to conduct stabilization policy and to act as a lender of the last resort to banks to stabilize the banking system. History & Structure of the Federal ReserveThe Federal Reserve ("the Fed") was founded in 1913-1914 after four severebanking panics. Two other central banks were set up in the 1800s but eachlasted only a short time. The Federal Reserve is chartered by the federalgovernment, but is largely independent of the authority of the Congress andPresident. The Fed must only report to the Congress periodically and operatewithin broad mandates.The role of the Fed is to conduct stabilization policy and to act as a lender ofthe last resort to banks to stabilize the banking system. The lender of lastresort is probably the Fed's biggest responsibility. Many economists believethat the Great Depression was due mainly to the collapse of our banking
system. The Fed did not do enough to prevent its collapse. When a businessneeds money, it can often go to the bank for help. Before the Federal Reservewas created, banks had nowhere to turn to when they were in trouble. TheFed is now there to back them up.The unique structure of the Federal Reserve is a consequence of history andpolitics. Figure 1 gives a breakdown of the main divisions within the Fed.Figure 1The Board of Governorsconsists of 7 members and is the highest governing body of the Federal Reserve. The Board of Governors is the highest governing body of the FederalReserve. It consists of 7 members including the chairperson, currently AlanGreenspan. The chair is appointed to a 4-year term by the President of theU.S. The appointment is usually staggered with the election of President ofU.S., i.e. every two years either the President or chair comes up forelection/appointment. However, this staggered cycle was disrupted when PaulVolcker resigned early from the Federal Reserve in 1987.

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