Harcourt Brace & Company The Federal Reserve (Review From Monday) u The Federal Reserve (“Fed”) serves as the nation’s central bank, which is designed

Harcourt Brace & Company

The Federal Reserve (Review From Monday)

The Federal Reserve (“Fed”) serves as the nation’s central bank, which is designed to oversee the banking system and regulate the quantity of money in the economy.

The “Fed” is a privately owned institution, authorized in 1914 by Congress to ensure the health of the nation’s banking system.


The Fed’s Organization

The Fed is run by its Board of Governors.– Seven members appointed by the

President of the United States.

– The Chairman of the Board is the most important position: presiding, directing, and testifying about Fed policy. She/He is appointed by the President.


The Fed’s Organization

The Federal Reserve System is made up of the Federal Reserve Board in Washington, D.C. and twelve regional Federal Reserve Banks.

Monetary policy is made by the Federal Open-Market Committee.


Three Primary Functions of the Fed Regulate the private banking

industry to make sure banks follow federal laws intended to promote safe and sound banking practices.

Act as a banker’s bank, making loans to other banks and as a lender of last resort.

Control of the supply of money i.e. Monetary Policy.


Money Supply Changes by the Fed Open-Market Operations: The primary

way in which the Fed changes the money supply done through the purchase and sale of U.S. government bonds with newly printed money.– To increase the money supply, the Fed

buys government bonds from the public.

– To decrease the money supply, the Fed sells government bonds to the public.


Fiscal and Monetary Policy Process

Next, we will read aloud a handout on Fiscal and Monetary Policy and complete 4 review questions followed by a 30 question multiple choice quiz.

Take out a separate sheet of paper and number your answers 1- 30. Just write the letter of the correct answer.

We will review each correct answer.


Use the fiscal policy of taxes to solve a recession.

1. What should Congress do to taxes to change the aggregate demand?A. Increase TaxesB. Reduce taxes

2.How will this change in taxes affect consumers’ disposable income?A. Disposable income increases B. Disposable income is reduced



3.What does Congress need to do to aggregate demand?A. Increase aggregate demand B. Reduce aggregate demand



4.How will this change in disposable income affect consumer spending in the economy?A. Spending increases B. Spending is reduced


Use the fiscal policy of government spending to solve inflation.

5.What does Congress need to do to aggregate demand?A. Increase aggregate demandB. Reduce aggregate demand

6.What should Congress do to government spending to change the aggregate demand?A. Increase government spendingB. Reduce government spending



7.How will this change in aggregate demand affect firms’ production and employment of workers?A. Production and employment increaseB. Production and employment fall



8.How will this change in production and employment affect consumers’ disposable income?A. Disposable income increasesB. Disposable income is reduced

9.How will this change in disposable income affect consumer spending in the economy?A. Spending increasesB. Spending is reduced


Use the monetary policy of open market operations to solve a recession.

10. What does the Federal Reserve need to do to aggregate demand?A. Increase aggregate demand B. Reduce aggregate demand

11. What does the Fed need to do to the money supply to change the aggregate demand?A. Increase the money supply B. Reduce the money supply



12.What should the Fed do to bonds to change the money supply?A. Buy bonds B. Sell bonds

13.How will this bond action affect the reserves available for loan at banks?A. Increase reserves B. Reduce reserves



14.How will this change in the money supply affect interest rates?A. Increase interest ratesB. Reduce interest rates

15.How will this change in interest rates affect the amount of money borrowed?A. Increase borrowing B. Reduce borrowing



16.How will this change in borrowing affect consumer spending in the economy?A. Spending increases B. Spending is reduced


Use the monetary policy of the discount rate to solve inflation.

17.What does the Federal Reserve need to do to aggregate demand?A. Increase aggregate demandB. Reduce aggregate demand

18.What does the Fed need to do to the money supply to change the aggregate demand?A. Increase the money supplyB. Reduce the money supply



19.What should the Fed do to the discount rate to change the money supply?A. Increase the discount rate B. Reduce the discount rate



20.How will this discount rate change affect the willingness of banks to borrow from the Fed and make reserves available for loan at banks?A. Increase reservesB. Reduce reserves

21.How will this change in the money supply affect interest rates?A. Increase interest rates B. Reduce interest rates



22.How will this change in interest rates affect the amount of money borrowed?A. Increase borrowingB. Reduce borrowing

23.How will this change in borrowing affect consumer spending in the economy?A. Spending increasesB. Spending is reduced


Use the monetary policy of the reserve requirement to solve inflation.

24.What does the Federal Reserve need to do to aggregate demand?A. Increase aggregate demandB. Reduce aggregate demand

25.What does the Fed need to do to the money supply to change the aggregate demand?A. Increase the money supplyB. Reduce the money supply



26.What should the Fed do to the reserve requirement to change the money supply?A. Increase the reserve requirement B. Reduce the reserve requirement

27.How will this reserve requirement change affect the reserves available for loan at banks?A. Increase reservesB. Reduce reserves



28.How will this change in the money supply affect interest rates?A. Increase interest rates B. Reduce interest rates

29.How will this change in interest rates affect the amount of money borrowed?A. Increase borrowingB. Reduce borrowing



30.How will this change in borrowing affect consumer spending in the economy?A. Spending increasesB. Spending is reduced


Assessment Activity

In 2001, the U.S. economy slipped into recession. The GDP dropped by more than a 1 percent annual rate in the third quarter, the inflation rate dropped to below a 2 percent annual rate in the fourth quarter, and the unemployment rate rose to 5.6 percent in the fourth quarter. As an economic advisor to the Congress and the Federal Reserve, what would you suggest U.S. Congress should do with its tools of fiscal policy, and what would you propose that the Fed do with its tools of monetary policy? Write a paragraph explaining your recommendations, being sure to describe how the tools will work to help improve aggregate demand.

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Harcourt Brace & Company The Federal Reserve (Review From Monday) u The Federal Reserve (“Fed”) serves as the nation’s central bank, which is designed