The Federal Reserve System

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Goals of the FED

Full employment

Price stability

Economic growth through moderate long term interest rates and the stability of the financial system

Structure of the Fed

Chairman ( now titled “Madame Chair”)

Board of Governors

FOMC

District Banks

Functions of the FED

Provide Financial services

Supervise and regulate banks

Maintain stability of the financial system

Conduct monetary policy

Tools of the FED

Discount rate

Reserve requirement

OMO

Interest on the reserve ( new tool as of 2008)

Tools and the money creation process

How can each tool be used to change the money supply?

2 types of Monetary Policy

Monetary Policy is counter-cyclical

Expansionary- “Easy money”

Contractionary- “Tight money”

Balance Sheets

Left side shows assets’

Right side shows liabilities

Both sides must be equal

Net worth equals assets minus liabilities