Warm Up

1. Warm Up Take a look at the top center of this dollar bill. It says “Federal Reserve Note” because this bill, like all other United States paper money, is issued by one of the twelve Federal Reserve Banks that are part of the Federal Reserve System. The U.S. Treasury issues coins. In the past, state governments and other banks were allowed to issue their own currency. Why do you think the decision was made that money would only be issued by the federal government?

2. Thursday, May 2, 2019 • Objective: Students will be able to analyze and evaluate monetary policy tools used by the Federal Reserve. • Purpose: Monetary policy is one of the most influential factors impacting the economy.

3. Central banks have three core functions, which include overseeing aspects of the whole economy and serving as the government’s banker. What is the overall purpose behind the first two functions?

4. One reason why the United States established a central banking system was to avoid financial speculation and panics. How can a central bank help achieve that goal?

5. The Federal Reserve System is made up of three levels. At which level would a nationally chartered bank in your community fit?

6. Board of Governors • Its 7 members are appointed for staggered 14-year terms by the President with the advice and consent of the Senate • No reappointment is allowed • The Chairperson of the Board of Governors is typically sensitive towards public opinion and an ability to use the media to affect it

7. The 12 District Banks are different sizes as measured by their assets. The New York Reserve Bank has a small geographic area but the largest number of assets.

8. Look at the membership of the FOMC. Why might the president of the New York Reserve Bank be the only Reserve Bank president who is a permanent member of the FOMC?

9. Federal Open Market Committee • most important body in the Federal Reserve system • makes key monetary policy decisions about interest rates and the growth of the money supply in the United States • Announcements of the FOMC’s decisions can affect financial markets and rates for home mortgages, as well as many economic institutions around the world

10. Monetary policy affects the economy by altering money supply and interest rates. Explain in your own words the basic mechanism by which monetary policy affects the larger economy.

11. Monetary Policy • Monetary Policy: Actions by the Federal Reserve to increase or decrease the supply of money • Easy Money Policy • Increase in money supply, which causes interest rates to decrease • This type of policy makes it easier to borrow money, which leads to higher spending and economic growth • If there is too much of an increase in the money supply, inflation occurs

12. Monetary Policy • Tight money policy • Decrease in the money supply, which causes interest rates to increase • This type of policy makes it more difficult to borrow money, which leads to lower spending and economic contraction • If there is too much of a reduction in the money supply, deflation occurs

13. Reserve Requirement • Reserve Requirement: Required amount of deposited funds that banks need to hold • Some banks will hold more money than the reserve requirement • Reducing the Reserve Requirement • Allows banks to make more loans to customers • Money supply increases

14. Reserve Requirement • Increasing the Reserve Requirement • Forces banks to make less loans to customers • Money supply decreases • Seen as disruptive to the banking system

15. The Fed uses reserve requirements to influence the money supply. Who or what is directly affected by a change in reserve requirements?

17. Discount Rate • Discount Rate: Interest rate that the Fed charges on loans to the nation’s financial institutions • Raising the discount rate • It becomes more expensive to borrow money, which leads to less investing and lower levels of spending • Reduces the money supply and slows down the economy • Federal Funds Rate: the interest rate banks charge one another for loans

18. In general, how has the federal funds rate changed during recessions? Why do you think this has happened?

19. Discount Rate • Lowering the discount rate • It becomes less expensive to borrow money, which leads to more investing and higher levels of spending • Increases the money supply and causes the economy to grow • Changes to the discount rate directly affect the prime rate (the lowest interest rate that commercial banks can charge their customers) and the Federal Funds Rate

22. The prime interest rate is not set by the Fed but by banks: it is the rate charged by the top 25 commercial banks. When was it cheaper to borrow money, in 2000 or 2010? Why?

23. According to this cartoon, the Fed has the same response to most situations. What effect should lowering interest rates have on the economy?

24. Open Market Operations • Open Market Operations: the buying and selling of government securities to alter the supply of money • These are the most frequently used monetary policy tool • When the Fed buys government securities, the money supply increases • When the Fed sells government securities, the money supply decreases

25. Open market operations involve the buying and selling of government securities. What steps would lead to a reduction in the money supply through open market operations?

28. Closing Think back to the dollar bill you examined before reading this lesson. Now you know that one of the jobs of the Fed is to issue the currency we use every day to make transactions. Of course, the Fed does much more than that. Write a paragraph explaining how well you think it has worked to have the Federal Reserve System as the only institution that can issue currency.

29. https://www.msnbc.com/velshi-ruhle/watch/president-trump-calls-the-fed-raising-rates-his-biggest-threat-1346504259660?v=railb&https://www.msnbc.com/velshi-ruhle/watch/president-trump-calls-the-fed-raising-rates-his-biggest-threat-1346504259660?v=railb&