1 / 6

Chapter 4 – Federal Reserve and Money

Chapter 4 – Federal Reserve and Money. BA 543 Financial Markets and Institutions. Chapter 4 – Federal Reserve. Purpose of Central Banks (Government Banks) – Maintain the stability and supply of the currency Risk Assessment Risk Reduction Oversight of Payment System

yardley
Download Presentation

Chapter 4 – Federal Reserve and Money

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 4 – Federal Reserve and Money BA 543 Financial Markets and Institutions

  2. Chapter 4 – Federal Reserve • Purpose of Central Banks (Government Banks) – Maintain the stability and supply of the currency • Risk Assessment • Risk Reduction • Oversight of Payment System • Crisis Management (Lender of last resort) • Printer of Money • Central Bank of the United States (Created 1913) • Federal Reserve System – Independent Agency • Board of Governors (Seven members) • Twelve Districts (President of each district) • Monetary Policy

  3. Chapter 4 – Federal Reserve • Reserve Requirement of Members • Fractional reserve banking system • Mandatory deposits are the required reserve ratio • Congress took over role via DIDMCA 1980 • Set rates for different classes of accounts • Open Market Operations • Buy or sell government securities • FOMC – Federal Open Market Committee • Repurchase agreements • Discount Rate • The rate banks can borrow from the Fed

  4. Chapter 4 – Federal Reserve • Money • Numeraire – unit to measure wealth • Money is any instrument that serves as a medium of exchange • Accepted as payment for goods and services • Stores of value (carries wealth through time) • Money Aggregates • Monetary Base – coins and currency in circulation plus total reserves (M1) • M2 = M1 plus savings accounts and money market accounts • Also M3 and L which are M2 plus other deposits

  5. Chapter 4 – Federal Reserve • Money Multiplier – Expansion of Money Supply • Link between M1 and banking system reserves • Four parties involved • Fed • Banks • Savers • Borrowers • How does it work… • Mathematical formula: ΔTDD = ΔR / REQ • TDD is total demand deposits • R is reserves injected by Fed into system • REQ is the required reserve ratio

  6. Chapter 4 – Federal Reserve • Interest Rates • Impact the bank’s reserves • Low rates increase excess reserves • High rates lower or eliminate reserves • Impact’s borrower’s cash holdings • Both Impact M1 • Money Supply in Open Economy • Foreigners hold US currency and impact exchange rate (for transactions and investing) • Fed participates in (intervenes) foreign currencies (buy and sells foreign currencies)

More Related