Lesson Plan - The Federal Reserve System


I. Organization/definitions
- what is a central bank?
- historical examples
- The Federal Reserve System (the FED)
- created in 1913
- semi-private corporation owned by member banks
- 7 member board of governors
- nominated by pres. and confirmed by congress (14 year term)
- supervise the Fed and general policy control
- 12 reserve banks with 12 districts in the U.S.
- purpose is to supply regions in the U.S. with central banking
- about 14,000 member banks either charted by the FED (national banks) or by states (state banks)
- profit margin is set by law, excess profits go back to the U.S. treasury
- The Feds open market committee
- consists of 7 board of governors and 5 additional members (from the presidents of the 12 regional reserve banks.
- purpose = to make decisions about the buying and selling of U.S. treasury notes (what are those?)
- Purpose of the Fed
- banker for commercial banks - lender of last resort
- banker for the federal government
- controls the U.S. money supply
- regulates money markets
II. Tools of the Fed in Controlling the U.S. Money supply
- legal reserve requirements (rr) are set by the FED.
- what are legal reserves?
- recall that ma = 1/(rr + xr). Hence, as rr increases, ma decreases.
- recall that MS = ma*MB. Hence, as rr increases, MS decreases
- most powerful tool of the FED but rarely used.
- open market operations
- most used tool to control the money supply
- definition? (the buying and selling of U.S. treasury bills/bonds)
- decisions regarding made by open market committee
- how does buying/selling U.S. treasury bills change the money supply?
- impact on the monetary base?
- example
- where does the Fed get the money to buy the treasury bills?
- the discount rate
- the Fed, as lender of last resort for commercial banks, will lend commercial banks money but charges them an interest rate which is called the discount rate.
- where does the Fed get the money to loan to member banks?
- how does the discount rate (dr) affect the money supply?
- if dr < the market rate of interest (i) => tendency to borrow money and hold less in excess reserves (why?) but when xr decreases, ma increases which increases the money supply.
- if dr > i => the reverse happens
- jawboning (moral suasion)
- what's that?
- impact on money supply?
- margin requirements and other regulatory controls
- definitions
- who affects the money supply in the U.S. besides the Fed?
- private individuals (how?)
- the U.S. government (how?)
- banks (how?)