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Principles of Macroeconomics and the Role of the Fed in Business

This article explores the principles of macroeconomics and their application in business, focusing on the functions of money, the components and tools of the Federal Reserve, and the role of the Fed in money creation.

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Principles of Macroeconomics and the Role of the Fed in Business

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  1. Principles of MacroeconomicsSpring 2011Day 14 Dr. Andrew L. H. Parkes “A Macroeconomic Understanding for use in Business” 卜安吉

  2. Money Principles of Macroeconomics, Day 14

  3. Chapter 30: Money, Banking, and the Fed • Know the functions: • Store of Value, Unit of account and medium of exchange • Fiat Money versus Commodity Money  • M1 is made up of what three components? • Currency in Circulation, Demand Deposits and travelers checks Principles of Macroeconomics, Day 14

  4. The Fed • What are the three components of the Fed organization? • The Governors • The Federal Reserve Banks • The Federal Open Market Committee “The Fed” is the Central Bank (CB) of the U.S.A. Principles of Macroeconomics, Day 14

  5. Three Tools of the Fed (CB) Bernanke, Chair • Open Market Operations • Discount Rate • Reserve Requirement Yellen, Vice Chair Currently there are 6 Federal Reserve Board Governors: Bloom Raskin Duke Warsh Tarullo http://www.federalreserve.gov/aboutthefed/default.htm Principles of Macroeconomics, Day 14

  6. 1. Open Market Operations • Federal Open Market Committee (FOMC) • The 7 Board of Governors (usually) • New York Fed Bank President • 4 other Presidents of the 11 other Fed Banks • Buy and Sell U.S. Treasury Bills(Notes and Bonds too but mostly Bills) • Their actions decrease/increase the interest rate (respectively). – called open market operations Principles of Macroeconomics, Day 14

  7. 2. Required Reserve Ratio Set by the Governors – the Reserve Ratio is the percentage of checkable deposits that must be kept at the Federal Reserve District Bank in their District as cash. The effect is that the cash is not available for banks to loan out. Principles of Macroeconomics, Day 14

  8. 3. Discount Window • The Discount Window is not a physical place but means that commercial banks may borrow from the Fed at the Discount Rate. Principles of Macroeconomics, Day 14

  9. 3. Discount Window • The “lender of last resort” function. • The legislation in 1913 created the Fed in 1914, not in the constitution. • Lending to banks was the central bank’s only role. Principles of Macroeconomics, Day 14

  10. The Federal Reserve System • The Board of Governors • The Fed Banks • The Federal Open Market Committee (FOMC) Principles of Macroeconomics, Day 14

  11. The Fed: The Board of Governors Principles of Macroeconomics, Day 14

  12. The Fed: The Fed Banks Principles of Macroeconomics, Day 14

  13. The Fed: The FOMC • The FOMC: • The Seven Governors, New York Fed President and 4 other Fed Presidents – 12 total members • Set Monetary Policy for the United States • In other words, the FOMC sets the “Federal Funds Rate” – The interest rate that banks borrow funds from each other • The “Fed Funds” rate determines the “Prime” rate or the interest rate that banks charge their “best” corporate customers • An Increase in the fed funds rate means borrowing is more “expensive.” • A decrease? Principles of Macroeconomics, Day 14

  14. The Fed: The FOMC • 2010 Members of the FOMC • Members • Ben S. Bernanke, Board of Governors, Chairman • William C. Dudley, New York, Vice Chairman • James Bullard, St. Louis • Elizabeth A. Duke, Board of Governors • Thomas M. Hoenig, Kansas City • Sandra Pianalto, Cleveland • Sarah Bloom Raskin, Board of Governors • Eric S. Rosengren, Boston • Daniel K. Tarullo, Board of Governors • Kevin M. Warsh, Board of Governors • Janet L. Yellen, Board of Governors • Alternate Members • Charles L. Evans, Chicago • Richard W. Fisher, Dallas • Narayana Kocherlakota, Minneapolis • Charles I. Plosser, Philadelphia • Christine M. Cumming, First Vice President, New York Next Meeting: Dec. 14, 2010 still 0 - 0.25% ff rate? http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm Principles of Macroeconomics, Day 14

  15. The Fed: The Chairman Where is it today? Ben Bernanke Principles of Macroeconomics, Day 14

  16. Money Creation Know how banks create money through demand deposits (checking accounts) and how the money multiplier works. Principles of Macroeconomics, Day 14

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